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Informational size and incentive compatibility with aggregate uncertainty

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  • McLean, Richard P.
  • Postlewaite, Andrew

Abstract

In McLean and Postlewaite (2002), we analyzed pure exchange economies with asymmetrically informed agents. We defined a notion of informational size and showed that, when the aggregate information of all agents resolves nearly all the uncertainty regarding the state of nature, the conflict between incentive compatibility and (ex post) efficiency can be made small if agents have sufficiently small informational size. This paper investigates the relationship between informational size and efficiency for the case in which nontrivial aggregate uncertainty is present, i.e., when significant uncertainty about the world persists even when the information of all agents is known. We prove the existence of incentive compatible, individually rational and nearly ex post efficient allocations without assuming negligible aggregate uncertainty when agents have small informational size relative to informational variability. We further show that the conflict between incentive compatibility and efficiency asymptotically vanishes when an economy is replicated.

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Bibliographic Info

Article provided by Elsevier in its journal Games and Economic Behavior.

Volume (Year): 45 (2003)
Issue (Month): 2 (November)
Pages: 410-433

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Handle: RePEc:eee:gamebe:v:45:y:2003:i:2:p:410-433

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Web page: http://www.elsevier.com/locate/inca/622836

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References

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  1. Gul, Faruk & Postlewaite, Andrew, 1992. "Asymptotic Efficiency in Large Exchange Economies with Asymmetric Information," Econometrica, Econometric Society, vol. 60(6), pages 1273-92, November.
  2. Richard McLean & Andrew Postlewaite, . "Informational Size and Incentive Compatibility," Penn CARESS Working Papers 7f6ff09d59945e06909ce4fa4, Penn Economics Department.
  3. Cremer, Jacques & McLean, Richard P, 1988. "Full Extraction of the Surplus in Bayesian and Dominant Strategy Auctions," Econometrica, Econometric Society, vol. 56(6), pages 1247-57, November.
  4. Cremer, Jacques & McLean, Richard P, 1985. "Optimal Selling Strategies under Uncertainty for a Discriminating Monopolist When Demands Are Interdependent," Econometrica, Econometric Society, vol. 53(2), pages 345-61, March.
  5. Postlewaite, Andrew & Schmeidler, David, 1986. "Implementation in differential information economies," Journal of Economic Theory, Elsevier, vol. 39(1), pages 14-33, June.
  6. McAfee, R Preston & Reny, Philip J, 1992. "Correlated Information and Mechanism Design," Econometrica, Econometric Society, vol. 60(2), pages 395-421, March.
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Cited by:
  1. Sun, Yeneng & Yannelis, Nicholas C., 2007. "Core, equilibria and incentives in large asymmetric information economies," Games and Economic Behavior, Elsevier, vol. 61(1), pages 131-155, October.
  2. Sun, Yeneng & Wu, Lei & Yannelis, Nicholas C., 2012. "Existence, incentive compatibility and efficiency of the rational expectations equilibrium," Games and Economic Behavior, Elsevier, vol. 76(1), pages 329-339.
  3. Stanislav Anatolyev & Grigory Kosenok, 2006. "Tests in contingency tables as regression tests," Working Papers w0075, Center for Economic and Financial Research (CEFIR).
  4. Kosenok, Grigory & Severinov, Sergei, 2008. "Individually rational, budget-balanced mechanisms and allocation of surplus," Journal of Economic Theory, Elsevier, vol. 140(1), pages 126-161, May.

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