Mechanism Design with Farsighted Agents

Abstract

Agents are farsighted when they consider the ultimate results to which their own actions may lead to. We re-examine the classical questions of implementation theory under complete information in a setting with transfers where farsighted coalitions are regarded as fundamental behavioral units and the equilibrium outcomes of their interactions are predicted via the stability notion of the largest consistent set. The designer's exercise consists of designing a rights structure, which formalizes the idea of power distribution in society. His or her challenge lies in designing a rights structure in which the equilibrium behavior of agents always coincides with the recommendation given by a social choice function. We show that (Maskin) monotonicity fully identifies the class of social choice functions that are implementable by a rights structure. We also discuss how this result changes when social choice correspondences are considered.

Keywords: farsightedness, implementation, transfers, rights structures, coalitions, largest consistent set, monotonicity

JEL Classification: C71, D71, D82