Delegated Networking

ABSTRACT We construct a model of a principal‐agent game of network formation (over layered networks) with asymmetric information and consider the following two questions: (1) Is it possible for the principal to design a mechanism that links the reports of agents' 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 an agent (a player) can connect to a club (here modeled as player‐club pair specific sets—or catalogs—of arc types) and then delegating connection choice to the player. We call this approach to network formation with incomplete information delegated networking and we show, under relatively mild conditions on our game‐theoretic model, that strategic network formation with incomplete information, implemented via a mechanism and centralized reporting, is equivalent to implementation via arc catalogs and delegated networking with monitoring. Because the principal's problem over connection catalogs can be shown to have a solution, our equivalence result allows us to show that the principal's much more difficult problem over incentive compatible network formation mechanisms has a solution.