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Incomplete Information, Incentive Compatibility and the Core

We consider an exchange economy in which agents possess private information at the time of engaging in state contingent contracts. While com-munication of private information is permitted, the true information state is not verifiable. The enforcement of contracts is, therefore, limited by incentive com-patibility constraints. We formalize a notion of the core for such an economy. Our analysis can be viewed as an attempt to incorporate incentive compatibility in Wilson's [1978] coarse core, or as an attempt to introduce coalitional contracts in the Holmstrom-Myerson [1983] notion of incentive efficiency. While there are some special cases in which the incentive compatible core is non-empty, our main result shows that this is not generally true.

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Paper provided by Brown University, Department of Economics in its series Working Papers with number 97-11.

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Length: 30 pages
Date of creation: 1997
Date of revision:
Handle: RePEc:bro:econwp:97-11
Contact details of provider: Postal: Department of Economics, Brown University, Providence, RI 02912

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  1. Forges, Françoise & Minelli, Enrico, 2001. "A note on the incentive compatible core," Economics Papers from University Paris Dauphine 123456789/5452, Paris Dauphine University.
  2. Milgrom, Paul & Stokey, Nancy, 1982. "Information, trade and common knowledge," Journal of Economic Theory, Elsevier, vol. 26(1), pages 17-27, February.
  3. Boyd, John H. & Prescott, Edward C., 1986. "Financial intermediary-coalitions," Journal of Economic Theory, Elsevier, vol. 38(2), pages 211-232, April.
  4. Postlewaite, Andrew & Schmeidler, David, 1986. "Implementation in differential information economies," Journal of Economic Theory, Elsevier, vol. 39(1), pages 14-33, June.
  5. FORGES , Françoise, 1993. "A Note on Pareto Optimality in Differential Information Economies," CORE Discussion Papers 1993043, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. Kobayashi, Takao, 1980. "Equilibrium Contracts for Syndicates with Differential Information," Econometrica, Econometric Society, vol. 48(7), pages 1635-65, November.
  7. Jackson, Matthew O, 1991. "Bayesian Implementation," Econometrica, Econometric Society, vol. 59(2), pages 461-77, March.
  8. Berliant, Marcus, 1992. "On income taxation and the core," Journal of Economic Theory, Elsevier, vol. 56(1), pages 121-141, February.
  9. Cass, David & Shell, Karl, 1983. "Do Sunspots Matter?," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 193-227, April.
  10. Bengt Holmstrom & Roger B. Myerson, 1981. "Efficient and Durable Decision Rules with Incomplete Information," Discussion Papers 495, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  11. Karl Shell & Aditya Goenka, 1997. "Robustness of sunspot equilibria," Economic Theory, Springer, vol. 10(1), pages 79-98.
  12. Myerson, Roger B., 1982. "Optimal coordination mechanisms in generalized principal-agent problems," Journal of Mathematical Economics, Elsevier, vol. 10(1), pages 67-81, June.
  13. Forges, F., 1991. "Posterior efficiency," CORE Discussion Papers 1991045, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  14. Yannelis, Nicholas C, 1991. "The Core of an Economy with Differential Information," Economic Theory, Springer, vol. 1(2), pages 183-97, April.
  15. Ichiishi, Tatsuro & Idzik, Adam, 1996. "Bayesian Cooperative Choice of Strategies," International Journal of Game Theory, Springer, vol. 25(4), pages 455-73.
  16. Edward C Prescott & Robert M Townsend, 2010. "Pareto Optima and Competitive Equilibria With Adverse Selection and Moral Hazard," Levine's Working Paper Archive 2069, David K. Levine.
  17. Guangsug Hahn & Nicholas C. Yannelis, 1997. "Efficiency and incentive compatibility in differential information economies," Economic Theory, Springer, vol. 10(3), pages 383-411.
  18. Wilson, Robert B, 1978. "Information, Efficiency, and the Core of an Economy," Econometrica, Econometric Society, vol. 46(4), pages 807-16, July.
  19. Koutsougeras, Leonidas C & Yannelis, Nicholas C, 1993. "Incentive Compatibility and Information Superiority of the Core of an Economy with Differential Information," Economic Theory, Springer, vol. 3(2), pages 195-216, April.
  20. Gul, Faruk & Postlewaite, Andrew, 1992. "Asymptotic Efficiency in Large Exchange Economies with Asymmetric Information," Econometrica, Econometric Society, vol. 60(6), pages 1273-92, November.
  21. Crawford, Vincent P, 1985. "Efficient and Durable Decision Rules: A Reformulation," Econometrica, Econometric Society, vol. 53(4), pages 817-35, July.
  22. Allen, Beth, 1993. "4. Market Games with Asymmetric Information : Verification and the Publicly Predictable Information Core," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 34(Special I), pages 101-122, December.
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