Would someone be so kind as to explain me the Revelation Principle with a simple example with two agents bidding for one good where one agent would lie about his perceived value of the good?
2026-04-18 22:57:07.1776553027
Revelation Principle
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Example: Take a first price sealed bid auction: Agents {1,2} with values $v_1 = 10$ and $v_2 = 20$. Assuming that bidder 1 bids truthful, bidder 2 would maximize his value by bidding $10+\epsilon$, which results in a utility of 20-10 = 10 for bidder 2 (as $\epsilon$ is arbitrary small). If he reported truthful, his utility would be 20-20=0. This shows, that in first price auctions, bidders might have an incentive to lie.
The revelation principle states that a mechanism which has a BSNE (but truthful reporting is not a dominant strategy), there has to be a payoff-equivalent (revelation) mechanism in which truthful reporting is a dominant strategy. In our example, the second price sealed bid auction is such a mechanism.
Note that this is a simplified example as I did not explain revelation nor show that the first price sealed bid aution has a BSNE, yet it should answer your question.