Strategy-proof allocation mechanisms for economies with public goods

This paper provides a characterization of the class of incentive compatible (i.e., strategy-proof) allocation mechanisms for decision problems associated with classical economic environments. It is shown that when at least one public good is provided, then only dictatorial allocation mechanisms are incentive compatible. Dictatorial mechanisms are very unsatisfactory, as any conflict of interest is always resolved in favor of a single individual (the dictator). This result reveals a basic incompatibility between incentive compatibility and any other desirable property (e.g., any kind of efficiency, fairness, etc.) of an allocation mechanism. In particular, incentive compatible allocation mechanisms typically produce inefficient outcomes

Strategy-proof allocation mechanisms for pure public goods economies when preferences are monotonic

A fundamental problem in public finance is that of allocating a␣given budget to financing the provision of public goods (education, transportation, police, etc.). In this paper it is established that when␣admissible preferences are those representable by continuous and increasing utility functions, then strategy-proof allocation mechanisms whose (undominated) range contains three or more outcomes are dictatorial on the set of profiles of strictly increasing utility functions, a dense subset of the domain in the topologies commonly used in this context. If admissible utility functions are further restricted to be strictly increasing, or if mechanisms are required to be non-wasteful, then strategy-profness leads to (full) dictatorship.Publicad

Strategy-proof mechanisms with monotonic preferences: The case of pure public goods economies

This paper explores a typical public finance problem where there are m public goods (education, transportation, police, etc.) provided in limited amounts due to budget constraints, and where individual's preferences are not known. It is shown that all institutions (i.e., decision mechanisms) available to decide the allocation of goods have very unattractive properties: either the decision mechanisms are not compatible with individual's incentives, or they are dictatorial (i.e, they are based on a single individual's preferences)

Prices, delay, and the dynamics of trade

We characterize the dynamics of trading patterns and market composition when trade is bilateral, finding a trading partner is costly, prices are determined by bargaining, and preferences are private information. We show that equilibrium is inefficient and exhibits delay as sellers price discriminate between buyers with different values. As frictions vanish, transaction prices are asymptotically competitive and the welfare loss of inefficient trading approaches zero, even though the trading patterns continue to be inefficient and delay persists.Publicad

An experimental study of communication and coordination in noncooperative games

This paper reports the results of an experiment designed to test the usefulness of alternative solution concepts to explain players' behavior in noncooperative games with preplay communication. In the experiment subjects communicate byplain conversationprior to playing a simple game. In this setting, we find that the presumption ofindividualisticandindependentbehavior underlying the concept of Nash equilibrium is inappropriate. Instead, we observe behavior to becoordinatedandcorrelated. Statistical tests reject Nash equilibrium as an explanation of observed play. The coalition proof correlated equilibrium of the game, however, explains the data when the possibility of errors by players is introducedPublicad

Coalition-proof equilibrium

We characterize the set of agreements that the players of a non-cooperative game may reach when they have the opportunity to communicate prior to play. We show that communication allows the players to correlate their actions. Therefore, we take the set of correlated strategies as the space of agreements. Since we consider situations where agreements are non-binding, they must not be subject to profitable self-enforcing deviations by coalitions of players. A coalition-proof equilibrium is a correlated strategy from which no coalition has an improving and self-enforcing deviation. A coalition-proof equilibrium exists when there is a correlated strategy which (i) has a support contained in the set of actions that survive the iterated elimination of strictly dominated strategies, and (ii) weakly Pareto dominates every other correlated strategy whose support is contained in that set. Consequently, the unique equilibrium of a dominance solvable game is coalition-proof

Capacity precommitment and price competition yield cournot outcomes

We study an industry of a homogeneous good where n firms with identical technology compete by first building capacity, and then, after observing the capacity decisions, choosing a "reservation price" at which they are willing to sell their entire capacities. We show that every pure strategy equilibrium yields the Cournot outcome, and that the Cournot outcome can be sustained by a pure strategy subgame perfect equilibrium

Auctions with heterogeneous entry costs

We study the impact of public and secret reserve prices in auctions where buyers have independent private values and heterogeneous entry costs. We find that in a standard auction the optimal (i.e., revenue maximizing) public reserve price is typically above the seller's value. Moreover, an appropriate entry fee together with a public reserve price equal to the seller's value generates greater revenue. Secret reserve prices, however, differ across auction formats. In a second-price sealed-bid auction the secret reserve price is above the optimal public reserve price; hence there is less entry, a smaller probability of sale, and both the seller revenue and the bidders' utility are less than with an optimal public reserve price. In contrast, in a first-price sealed-bid auction the secret reserve is equal to the seller's value, and the bidders' expected utility (seller revenue) is greater (less) than with an optimal public reserve price

Coalition-proof equilibrium

We characterize the agreements that the players of a noncooperative game may reach when they can communicate prior to play, but they cannot reach binding agreements: A coalition-proo[ equilibrium is a correlated strategy from which no coalition has an improving and self-enforcing deviation. We show that any correlated strategy whose support is contained in the set of actions that survive the iterated elimination of strictly dominated strategies and weakly Pareto dominates every other correlated strategy whose support is contained in that set, is a coalition-proof equilibrium. Consequently, the unique equilibrium of a dominance solvable game is coalition-proof.Publicad

An experimental study of communication and cooperation in noncooperative games

This paper reports the results of an experiment designed to test the usefulness of alternative solution concepts to explain players' behavior in noncooperative games with preplay communication. In the experiment subjects communicate by plain conversation prior to playing a simple game. In this setting, we find that the presumption of individualistic and independent behavior underlying the concept of Nash equilibrium is inappropriate. Instead, we observe behavior to be cooperative and correlated. Statistical tests reject Nash equilibrium as an explanation of observed play. The coalition proof equilibrium of the game, however, explains the data when the possibility of errors by players is introduced