Network Formation through Mechanism Design

The central aim of this research is to develop a mechanism design framework for network formation that allows a principal (or “network architect”) to optimize global properties of a network while ensuring that participating agents truthfully reveal their private preferences and are willing to join. The paper extends Myerson’s one-dimensional auction theory to a multidimensional setting where both the principal and agents can have arbitrary valuations over all possible network configurations. It characterizes optimal incentive-compatible and individually rational mechanisms under novel regularity conditions, provides an “ironing” procedure for irregular cases, and shows that the approach can be implemented through practical mechanisms such as a first-price network auction.

These findings provide a new way for planners to design networks that achieve global objectives—such as resilience, diversity, or efficiency—while ensuring that participants truthfully reveal their preferences and willingly take part. By extending optimal auction theory to multidimensional network settings, the work offers both a theoretical advance in mechanism design and a practical framework that can be implemented using familiar formats like first-price auctions. This matters because many real-world networks, from supply chains to research collaborations, suffer from inefficiencies when left to uncoordinated local decisions, and the proposed approach offers a principled way to align individual incentives with system-wide goals.