
doi: 10.2139/ssrn.6608939
This paper studies the allocation of an object under hierarchical interdependence: a senior agent's value depends only on her own private information, while a junior agent's value depends both on his own private information and on what the senior privately knows. I characterize the optimal mechanism under ex-post incentive and participation constraints for a general planner objective spanning profit-oriented and welfare-oriented design. Hierarchical interdependence makes the problem tractable by reducing the implementability correction to a sequence of one-dimensional monotonicity corrections (ironing operation in the spirit of Myerson (1981)). The optimal mechanism is two-tiered. In the profit-oriented case, low senior values lead the mechanism to screen the junior through a posted price, while high senior values lead to a virtual-value comparison rule. In the welfare-oriented case, low senior values lead to costless assignment to the junior, while high senior values again lead to a virtual-value comparison rule.
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