Probabilistic Verification in Mechanism Design

Abstract

We introduce a model of probabilistic verification in mechanism design. The principal elicits a message from the agent and then selects a test to give the agent. The agent's true type determines the probability with which he can pass each test. We characterize whether each type has an associated test that best screens out all other types. If this condition holds, then the testing technology can be represented in a tractable reduced form. We use this reduced form to solve for profit-maximizing mechanisms with verification. As the verification technology varies, the solution continuously interpolates between the no-verification solution and full surplus extraction.

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