Incentive Compatibility

Abstract

Allocation mechanisms, organizations, voting procedures, regulatory bodies and many other institutions are designed to accomplish certain ends such as the Pareto-efficient allocation of resources or the equitable resolution of disputes. In many situations it is relatively easy to conceive of feasible processes; processes which will accomplish the goals if all participants follow the rules and are capable of handling the informational requirements. Examples of such mechanisms include marginal cost pricing, designed to attain efficiency, and equal division, designed to attain equity. Of course once a feasible mechanism is found, the important question then becomes whether such a mechanism is also informationally feasible and compatible with ‘natural’ incentives of the participants. Incentive compatibility is the concept introduced by Hurwicz (1972, p. 320) to characterize those mechanisms for which participants in the process would not find it advantageous to violate the rules of the process.