We construct a model of a principal-agent game of network formation (over layered networks) with asymmetric information and we consider the following two questions: (1) Is it possible for the principal to design a mechanism that links the reports of agents about their private information and the set of connections allowed and recommended by the principal via the mechanism in such a way that players truthfully reveal their private information to the principal and follow the recommendations specified by the mechanism. (2) An even more fundamental question we address is whether or not it is possible for the principal to achieve the same outcome (as that achieved via a mechanism and centralized reporting) by instead choosing a profile of sets of allowable ways to connect (here modeled as player—club specific sets - or catalogs - of networks) and then delegating connection choices to each pair of agents. We call this approach to network formation with incomplete information delegated networking and we show, under relatively mild conditions on our game-theoretic model of network formation, that strategic network formation with incomplete information, implemented via a mechanism and centralized reporting, is equivalent to implementation via delegated networking with monitoring.
Publication Date
Systemic Risk Centre Discussion Papers DP 56
