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The revelation principle does not always hold when strategies of agents are costly

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  • Wu, Haoyang

Abstract

The revelation principle asserts that for any indirect mechanism and equilibrium, there is a corresponding direct mechanism with truth as an equilibrium. Although the revelation principle has been a fundamental theorem in the theory of mechanism design for a long time, so far the costs related to strategic actions of agents spent in a mechanism have not been fully discussed. In this paper, we investigate the correctness of the revelation principle when strategies of agents are costly. We point out two key results: (1) The strategy of each agent in the direct mechanism is just to report a type. Each agent does not need to take any other action to prove himself that his reported type is truthful, and should not play the strategy as specified in the indirect mechanism. Hence each agent should not spend the strategic costs in the direct mechanism (see Proposition 1); (2) When strategic costs cannot be neglected in the indirect mechanism, the proof of revelation principle given in Proposition 23.D.1 of the book ``A. Mas-Colell, M.D. Whinston and J.R. Green, Microeconomic Theory, Oxford University Press, 1995'' is wrong (see Proposition 2). We construct a simple labor model to show that a Bayesian implementable social choice function is not truthfully implementable (see Proposition 4), which contradicts the revelation principle.

Suggested Citation

  • Wu, Haoyang, 2018. "The revelation principle does not always hold when strategies of agents are costly," MPRA Paper 87919, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:87919
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    References listed on IDEAS

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    1. Jerry R. Green & Jean-Jacques Laffont, 1986. "Partially Verifiable Information and Mechanism Design," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 53(3), pages 447-456.
    2. Myerson, Roger B, 1979. "Incentive Compatibility and the Bargaining Problem," Econometrica, Econometric Society, vol. 47(1), pages 61-73, January.
    3. Myerson, Roger B., 1982. "Optimal coordination mechanisms in generalized principal-agent problems," Journal of Mathematical Economics, Elsevier, vol. 10(1), pages 67-81, June.
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    More about this item

    Keywords

    Revelation principle; Game theory; Mechanism design.;
    All these keywords.

    JEL classification:

    • D71 - Microeconomics - - Analysis of Collective Decision-Making - - - Social Choice; Clubs; Committees; Associations
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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