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Uncertainty, efficiency and incentive compatibility: Ambiguity solves the conflict between efficiency and incentive compatibility

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  • De Castro, Luciano
  • Yannelis, Nicholas C.

Abstract

A fundamental result of modern economics is the conflict between efficiency and incentive compatibility, that is, the fact that some Pareto optimal (efficient) allocations are not incentive compatible. This conflict has generated a huge literature, which almost always assumes that individuals are expected utility maximizers. What happens if they have other kind of preferences? Is there any preference where this conflict does not exist? Can we characterize those preferences? We show that in an economy where individuals have complete, transitive, continuous and monotonic preferences, every efficient allocation is incentive compatible if and only if individuals have maximin preferences.

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  • De Castro, Luciano & Yannelis, Nicholas C., 2018. "Uncertainty, efficiency and incentive compatibility: Ambiguity solves the conflict between efficiency and incentive compatibility," Journal of Economic Theory, Elsevier, vol. 177(C), pages 678-707.
    • Handle: RePEc:eee:jetheo:v:177:y:2018:i:c:p:678-707
    DOI: 10.1016/j.jet.2018.02.008
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    More about this item

    Keywords

    Asymmetric information; Ambiguity aversion; Incentive compatibility; Mechanism design; First-best; Second-best;
    All these keywords.

    JEL classification:

    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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