Signaling via Money

2026-10-02

AI Summary

This study addresses the theoretical divergence in how private versus public transfers affect third-party beliefs and allocation outcomes within mechanism design. Drawing upon mechanism design, game theory, and information economics, it investigates preference-dependent and signaling mechanisms by contrasting equilibrium outcomes under these two transfer regimes. The central contribution establishes that equilibria achievable through hidden transfers can be arbitrarily approximated by public transfers, demonstrating that information distortion vanishes asymptotically over time. This finding indicates that transfer visibility induces only negligible informational distortion, thereby providing a rigorous theoretical foundation for assuming unobservable transfers in aftermarket models.

Abstract

We study mechanisms in which agents' preferences depend both on an object allocation and on a third party's beliefs about private information. A mechanism determines an allocation, transfers, and sends signals to the aftermarket. We compare two informational environments: (i) private transfers, where the aftermarket observes allocations and signals, and (ii) public transfers, where transfers are publicly observable. Our main result shows that any equilibrium outcome implementable with hidden transfers can be approximated arbitrarily well with public transfers. Thus, transfer observability generates at most a vanishing informational distortion and helps rationalize the common assumption that transfers remain hidden from aftermarkets.

Problem

• mechanism design
• signaling
• transfer observability
• aftermarket
• information distortion

Innovation

• Mechanism Design
• Signaling
• Information Distortion
• Public Transfers
• Aftermarket