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Information, Incentives, and Economics Mechanisms

Information, Incentives, and Economics Mechanisms: Essays in Honor of Leonid Hurwicz

Theodore Groves
Roy Radner
Stanley Reiter
Copyright Date: 1987
Edition: NED - New edition
Pages: 408
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    Information, Incentives, and Economics Mechanisms
    Book Description:

    Information, Incentives, and Economics Mechanisms was first published in 1987. In 1960, economist Leonid Hurwicz formulated a theoretical model that initiated a field of research on the design and analysis of economic mechanisms (the institutional rules and structures by which economic activity is coordinated). By treating mechanisms as a “variable,” this research provided a methodology for their comparison. The inefficiency of mechanisms arises from 1) the dispersion of information among agents, and 2) agents’ incentives to seek private advantage from this dispersion. Exploration of these limits to efficiency was pioneered by Hurwicz in 1972, and has become a major area of active research. In part, this research enables economic theory to be a more effective instrument for the study of how a society can and should organize its economic activity. The fourteen new papers in this volume -- by a group of distinguished economists, all former students, colleagues, and collaborators of Hurwicz -- address major themes in the study of information and incentives for implementing desired economic allocations. Two comprehensive survey essays provide introductions to the topics of incentive in decentralized organizations generally and, more specifically, in classical models of private goods and public goods economies. The following sections deal with informational aspects of mechanism theory, information and the stability of general resource allocation mechanisms, market mechanisms, and nonmarket and general mechanisms. In addition to the editors, the contributors are: Masahiko Aoki, Kenneth J. Arrow, Xavier Calsamiglia, Jerry R. Green, James S. Jordan, Jean-Jacques Laffont, John Ledyard, Thomas Marschak, Eric Maskin, Andreu Mas-Coleli, Kenneth R. Mount, Andrew Postlewaite, Jean-Charles Rochet, John Roberts, David Schmeidler, and William Thomson.

    eISBN: 978-0-8166-5535-9
    Subjects: Economics
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Table of Contents

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  1. Front Matter (pp. i-iv)
  2. Table of Contents (pp. v-vi)
  3. Preface (pp. vii-viii)
    T. G, R. R and S. R
  4. I Introduction
    • 1 Decentralization and Incentives (pp. 3-47)
      Roy Radner

      This chapter reviews some theories of economic decentralization, beginning with the theory of teams. Team theory is concerned with the efficient use of information in an organization in which different decision makers need not have identical information. Efficiency is evaluated in terms of an overall organizational goal or objective function, and explicit attention is not paid to the private incentives of the individual decision makers. After introducing the theory of teams, I go on to review various incentive problems, including misrepresentation, moral hazard, and free riding. These problems, and proposed remedies, are discussed in more detail in a series of...

    • 2 Incentive Compatibility Since 1972 (pp. 48-112)
      Theodore Groves and John O. Ledyard

      Although discussions of the role of private incentives have been included in writings on economics and political economy for more than two hundred years—at least as far back as Adam Smith’sWealth of Nations—the formal treatment of the subject is a recent development in economics. A seminal paper of the modern era was written in 1972 by Leo Hurwicz, a dozen years after his pathbreaking work on the foundations of decentralized resource allocation mechanisms.¹ In that paper he introduced the concept of incentive compatibility and proved that there cannot exist any informationally decentralized mechanism (or procedure) for resource...

  5. II Informational Comparisons
    • 3 Informational Requirements of Parametric Resource Allocation Processes (pp. 115-131)
      Xavier Calsamiglia

      In the information decentralization literature, a resource allocation mechanism, as formalized in Hurwicz (1960) and Mount and Reiter (1974a), is thought of as consisting of two phases. In the first phase there is a communication process in which all the agents participate actively by sending and receiving messages until an equilibrium message is reached. In the second phase agents play a passive role since the equilibrium message is translated into an action without taking into account any of the agents’ characteristics. Thus, we can imagine the equilibrium message as being fed to a computer that automatically yields the solution. Intuitively...

    • 4 Price versus Direct Revelation: Informational Judgments for Finite Mechanisms (pp. 132-180)
      Thomas Marschak

      Studying the message size required by allocation mechanisms a venture pioneered by L. Hurwicz supplied some first rigorous support for a classic claim: what the competitive (or price) mechanism achieves cannot be achieved at a lower informational cost. The claim is implicit, for example, in the debate of the 1930s and 1940s as to how a socialist economy might operate. On all sides of the debate, most participants agreed on the price mechanism, in some suitable guise, as the only informationally plausible procedure for a centrally directed economy the "only salvation of the economy" in Lerner's words (1944, 62). The...

  6. III Information and Stability
    • 5 The Informational Requirements of Local Stability in Decentralized Allocation Mechanisms (pp. 183-212)
      James s. Jordan

      This chapter presents a general model of continuous-time decentralized adjustment processes. Each agent chooses a message in response to his private characteristics and the state of the mechanism, and the messages of all agents determine an adjustment in the state. The first result is that, under a local stability condition, the paths from initial states to stationary states describe a homotopy equivalence between the map from environments to their equilibrium states and the map from environments to adjustments at a given initial state. This equivalence is subsequently applied to adjustment processes for exchange environments with the competitive message space as...

    • 6 On the Existence of a Locally Stable Dynamic Process with a Statically Minimal Message Space (pp. 213-240)
      Kenneth R. Mount and Stanley Reiter

      In his seminal paper, Hurwicz (1960) introduced a formal model of an adjustment process. The aim of the line of research he started with that paper is to provide a theoretical foundation for evaluating and comparing systems for coordinating economic activity. The model he introduced is dynamic, an adjustment process was defined by a system of difference equations which model the process of communication among economic agents, enabling them eventually to arrive at an allocation of resources. One of the important properties entering into the evaluation of such a system is the “amount” of communication required in order that the...

  7. IV Market Mechanisms
    • 7 Technical Information, Returns to Scale, and the Existence of Competitive Equilibrium (pp. 243-255)
      kenneth J. Arrow

      It is obvious that production requires information: in “standard” general competitive equilibrium theory, this information is embodied in the production possibility set. This kind of information can be called “technical information”; it can be thought of as a recipe. The standard treatment is correct so long as information can be taken as given and not subject to alteration by deliberate choice. But, in fact, the acquisition of new technical information has proceeded on an increasingly rapid scale in the last century or more, and the volume of resources devoted to it has become very large. This fact has been much...

    • 8 Optimal Nonlinear Pricing with Two-Dlmensional Characteristics (pp. 256-266)
      Jean-Jacques Laffont, Eric Maskin and Jean-Charles Rochet

      Recently a large literature has developed that treats the pricing problem of a monopolist who has imperfect information about buyers (see Maskin and Riley 1984; Mussa and Rosen 1978; Roberts 1979; Spence 1977; among others). This problem is a particular instance of a large class of incentive problems, the general analysis of which was pioneered by Hurwicz (see, for example, Hurwicz 1960, 1972). Other special cases that are formally similar include optimal tax theory and the design of public decision mechanisms.

      The monopolist’s problem is to select a (nonlinear) pricing scheme to maximize, say, its profit subject to the constraint...

    • 9 On the Second Welfare Theorem for Anonymous Net Trades in Exchange Economies with Many Agents (pp. 267-292)
      Andreu Mas-Colell

      This chapter is set in the economic environment of an exchange economy with a continuum of traders. It offers sufficient conditions for the efficient net trades attainable by the use of anonymous mechanisms to be Walrasian. In other words, given efficiency, anonymity rules out net transfers of wealth. This is a problem of the Second Fundamental Theorem of Welfare Economics variety. The converse First Fundamental Theorem question, that is, conditions for anonymous mechanisms to yield efficient net trades in continuum exchange economies, was investigated by Dubey, Mas-Colell, and Shubik (1980).

      There shall be no need to consider mechanisms explicitly. The...

  8. V Nonmarket and General Mechanisms
    • 10 Incentive-Compatible Approximation of a Nashlike Solution under Nonconvex Technology (pp. 295-307)
      Masahiko Aoki

      In this chapter we design and examine a decentralized allocation-distribution mechanism for approximating a Nashlike solution for two agents who contribute their own specific resources to a production process characterized by (external) economies of scale and who share the output of production either collectively or exclusively. This mechanism is managed by a neutral arbiter who specifies inputs of resources and shares in outputs for the two agents. This quantity-adjustment type mechanism is called the Management Arbitrated process (MA process). Economic knowledge necessary for the operation of this process is dispersed initially. Each agent knows only his own preference and resource...

    • 11 Limited Communication and Incentive Compatibility (pp. 308-329)
      Jerry R. Green and Jean-Jacques Laffont

      Two of the major themes of Leo Hurwicz’s work are the construction of incentive-compatible mechanisms and the informational requirements of decentralized resource-allocation processes. In this chapter we consider a problem that arises because of the interaction of these concerns. We study the impact of limited communication possibilities on the design and performance of incentive-compatible mechanisms. The privacy of information and the conflicting objectives of the agents give rise to the need for incentive-compatible procedures. The complexity of information places some limits on the possibility of its full communication and-utilization. Costs of transmission, storage, and information processing are among the factors...

    • 12 Differential Information and Strategic Behavior in Economic Environments: A General Equilibrium Approach (pp. 330-348)
      Andrew Postlewaite and David Schmeidler

      The last three decades have seen the development of what is probably the most general model in economic theory—the Arrow-Debreu model of general equilibrium theory. Within this model it has been possible to prove the existence of equilibrium under very general conditions and to prove that the equilibrium allocations are Pareto efficient. Over the last decade, however, there have been a plethora of papers dealing with (sometimes) less general models in which either the existence or the efficiency of equilibria is called into question. Akerlof, in his now famous “Lemons” paper (1970), showed that in a model in which...

    • 13 Incentives, Information, and Iterative Planning (pp. 349-374)
      John Roberts

      In his 1972 Ely Lecture, Leonid Hurwicz identified the “proper integration of the information and incentive aspects of resource allocation models [as] perhaps the major unsolved problem in the theory of mechanism design” (1972a, 27). In the intervening years, a rich literature has developed on the incentive problem, and the information issue of the size of the message needed to achieve satisfactory performance has also received significant attention. Still, the desired integration hardly can be considered to have been achieved. Indeed, with the exception of some recent work (Green 1982; Green and Laffont 1987; Reichelstein 1984a, 1984b), there has been...

    • 14 The Vulnerability to Manipulative Behaviour of Resource Allocation machanisms Designed to Select Equitable and Efficient Outcomes (pp. 375-398)
      William Thomson

      In the recent studies of the manipulability of resource allocation mechanisms (see, in particular, Sobel 1980; Thomson 1984 contains a short review of this literature) the focus has been mainly on mechanisms designed to select individually rational (weakly preferred by everyone to the initial position) and efficient outcomes. If agents are entitled to their initial endowments, the conditions of individual rationality is desirable, since it ensures everyone’s participation. However, inequities in initial endowments typically will be reflected in the final allocations reached through the operation rational of individually rational mechanisms. If agents do not have inalienable rights to their initial...

  9. Contributors (pp. 399-399)
  10. Backmatter (pp. 400-400)