Mechanism Design by an Informed Principal: Private Values with Transferable Utility

Abstract

We provide a solution to the informed-principal problem in the independent private values setting with monetary transfers. The principal's private information creates signaling considerations that may distort the implemented allocation. We show that there is no distortion: all principal types implement an allocation that is optimal for the principal ex ante, before he/she learns his/her type. As an application, we consider settings with linear utility. For bilateral exchange in which the principal is one of the traders, the solution is a combination of a participation fee, a buy-out option for the principal, and a resale stage with posted prices.