A Convergent Demand Revealing Process

Abstract

Presented is a decentralized tâtonnement public good allocation process that converges to an efficient allocation in a wide class of two good neoclassical economies when consumers are permitted to be non-competitive utility maximizers. The process is a demand revealing mechanism generalized to include an enforcement rule administered by the government which defines a response function, making the government a dynamically active participant• in the allocation process. This generalization greatly improves upon the basic mechanism which has been considered extensively in the literature, and under which the government functions as a passive public good procurement agent when the model is formulated dynamically, solely processing information received from consumers and then implementing the implied demands. Inclusion of an enforcement rule permits the government to impose an intertemporal consistency requirement on the communications of individual consumers. It is shown that •there is an enforcement rule so that a strategy equilibrium is always attained asymptotically and so that the equilibrium allocation is efficient; in equilibrium, there is no waste, no bankruptcy and consumers communicate local truth.