Mechanism Design with Moral Hazard

This paper characterizes when the one-stage deviation IC constraints in the usual sense of dynamic mechanism design are sufficient. One can easily construct examples of when they are not sufficient. If the current state or the belief is not a sufficient summary statics of the agent’s private history, the one-stage deviation IC constraints are not sufficient in general. The paper provides sufficient conditions for when they are sufficient in the usual sense; it also provides a necessary and sufficient condition for all IC constraints if the one-stage deviation IC constraints in the usual sense are not sufficient.