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Incentive Compatibility and Differentiability: New Results and Classic Applications

Author

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  • George J. Mailath

    (Department of Economics, University of Pennsylvania)

  • Ernst-Ludwig von Thadden

    (Department of Economics, University of Mannheim)

Abstract

This note provides several generalizations of Mailath's (1987) result that incentive compatibility plus separation implies differentiability. The new results extend the theory to classic models in finance such as Leland and Pyle (1977), Glosten (1989), and De Marzo and Duffie (1999), that were not previously covered.

Suggested Citation

  • George J. Mailath & Ernst-Ludwig von Thadden, 2010. "Incentive Compatibility and Differentiability: New Results and Classic Applications," PIER Working Paper Archive 10-032, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  • Handle: RePEc:pen:papers:10-032
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    References listed on IDEAS

    as
    1. Mailath, George J. & Nöldeke, Georg, 2008. "Does competitive pricing cause market breakdown under extreme adverse selection?," Journal of Economic Theory, Elsevier, vol. 140(1), pages 97-125, May.
    2. Kreps, David M & Wilson, Robert, 1982. "Sequential Equilibria," Econometrica, Econometric Society, vol. 50(4), pages 863-894, July.
    3. Hellwig, Martin, 1992. "Fully revealing outcomes in signalling models: An example of nonexistence when the type space is unbounded," Journal of Economic Theory, Elsevier, vol. 58(1), pages 93-104, October.
    4. Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 32(2), pages 371-387, May.
    5. In-Koo Cho & David M. Kreps, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(2), pages 179-221.
    6. John G. Riley, 2001. "Silver Signals: Twenty-Five Years of Screening and Signaling," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 432-478, June.
    7. Mailath, George J, 1987. "Incentive Compatibility in Signaling Games with a Continuum of Types," Econometrica, Econometric Society, vol. 55(6), pages 1349-1365, November.
    8. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 38(2), pages 175-208.
    9. Glosten, Lawrence R, 1989. "Insider Trading, Liquidity, and the Role of the Monopolist Specialist," The Journal of Business, University of Chicago Press, vol. 62(2), pages 211-235, April.
    10. Peter DeMarzo & Darrell Duffie, 1999. "A Liquidity-Based Model of Security Design," Econometrica, Econometric Society, vol. 67(1), pages 65-100, January.
    11. Kartik, Navin & Ottaviani, Marco & Squintani, Francesco, 2007. "Credulity, lies, and costly talk," Journal of Economic Theory, Elsevier, vol. 134(1), pages 93-116, May.
    12. Michael Spence, 1973. "Job Market Signaling," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 87(3), pages 355-374.
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    Cited by:

    1. Mike Burkart & Samuel Lee, 2016. "Smart Buyers," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 5(2), pages 239-270.
    2. Junjie Zhou & Ying-Ju Chen, 2016. "Targeted Information Release in Social Networks," Operations Research, INFORMS, vol. 64(3), pages 721-735, June.
    3. Weng, Xi & Wu, Fan & Yin, Xundong, 2023. "Linear Riley equilibria in quadratic signaling games," Journal of Economic Theory, Elsevier, vol. 213(C).
    4. Jiwoong Lee & Rudolf Müller & Dries Vermeulen, 2019. "Separating equilibrium in quasi-linear signaling games," International Journal of Game Theory, Springer;Game Theory Society, vol. 48(4), pages 1033-1054, December.
    5. Mike Burkart & Samuel Lee, 2016. "Smart Buyers," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 5(2), pages 239-270.
    6. Christopher Gedge & James W. Roberts & Andrew Sweeting, 2014. "A Model of Dynamic Limit Pricing with an Application to the Airline Industry," NBER Working Papers 20293, National Bureau of Economic Research, Inc.
    7. Lisa M. Scheele & Ulrich W. Thonemann & Marco Slikker, 2018. "Designing Incentive Systems for Truthful Forecast Information Sharing Within a Firm," Management Science, INFORMS, vol. 64(8), pages 3690-3713, August.
    8. Fuhai HONG & Xiaojian ZHAO, 2014. "Sunk Cost as a Self-Disciplining Device," Economic Growth Centre Working Paper Series 1503, Nanyang Technological University, School of Social Sciences, Economic Growth Centre.
    9. Andrew M. Davis & Elena Katok & Anthony M. Kwasnica, 2014. "Should Sellers Prefer Auctions? A Laboratory Comparison of Auctions and Sequential Mechanisms," Management Science, INFORMS, vol. 60(4), pages 990-1008, April.
    10. Ryo Ishida & Takuro Miyamoto, 2014. "Does an Optimal Voluntary Approach Flexibly and Efficiently Control Emissions from Heterogeneous Firms?," Discussion papers ron257, Policy Research Institute, Ministry of Finance Japan.

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    More about this item

    Keywords

    Adverse selection; separation; differentiable strategies; incentive-compatibility;
    All these keywords.

    JEL classification:

    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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