ABSTRACT
This chapter describes a formulation of the problem of mechanism design when the participants have private information. Allocations that are efficient within the constraints imposed by incentive compatibility and individual rationality are characterized in terms of necessary conditions. The formulation includes the design of optimal trading procedures, such as auctions, as a special case. The design of procedural rules invokes a different and weaker criterion for efficiency than the traditional criterion of Pareto optimality. The Pareto criterion requires the strong property that no alternative outcome could improve the welfare of every participant. Each participant's weight can be contingent on his reported type. The chapter employs Mirrlees' method to present a capsule summary of necessary conditions that characterize an efficient allocation. It uses the context of selection of an investment project by a group of investors, each of whom might be risk averse, have private information.
