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Informational Size and Incentive Compatibility with Aggregate Uncertainty

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Author Info
Richard McLean () (Department of Economics, Rutgers University)
Andrew Postlewaite () (Department of Economics, University of Pennsylvania)

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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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Publisher Info
Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 03-003.

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Length: 30 pages
Date of creation: 01 Nov 2001
Date of revision: 23 Jan 2003
Handle: RePEc:pen:papers:03-003

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Related research
Keywords: Incentive compatibility mechanism design incomplete information informational size

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Find related papers by JEL classification:
D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
D60 - Microeconomics - - Welfare Economics - - - General
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information

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  1. 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. [Downloadable!] (restricted)
  2. 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. [Downloadable!] (restricted)
  3. McAfee, R Preston & Reny, Philip J, 1992. "Correlated Information and Mechanism Design," Econometrica, Econometric Society, vol. 60(2), pages 395-421, March. [Downloadable!] (restricted)
  4. Richard McLean & Andrew Postlewaite, 2002. "Informational Size and Incentive Compatibility," Econometrica, Econometric Society, vol. 70(6), pages 2421-2453, November. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Roust, Kevin A. & Plott, Charles R., 2005. "The design and testing of information aggregation mechanisms: A Two-stage parimutuel IAM," Working Papers 1245, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
  2. Stanislav Anatolyev & Grigory Kosenok, 2006. "Tests in contingency tables as regression tests," Working Papers w0075, Center for Economic and Financial Research (CEFIR). [Downloadable!]
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