Extremal Incentive Compatible Transfers

IGIER Working Paper No. 359

33 Pages Posted: 9 Apr 2011

See all articles by Nenad Kos

Nenad Kos

Bocconi University - Department of Economics

Matthias Messner

University of Cologne

Date Written: December 20, 2008

Abstract

We characterize the boundaries of the set of transfers implementing a given allocation rule without imposing any assumptions on the agent's type space or utility function besides quasi-linearity. In particular, we characterize the pointwise largest and the pointwise smallest transfer that implement a given allocation rule and are equal to zero at some prespeci fied type (extremal transfers). Exploiting the concept of extremal transfers allows us to obtain an exact characterization of the set of all implementable allocation rules (the set of transfers is non-empty) and the set of allocation rules satisfying Revenue Equivalence (the extremal transfers coincide).

Furthermore, we show how the extremal transfers can be put to use in mechanism design problems where Revenue Equivalence does not hold. To this end we first explore the role of extremal transfers when the agents with type dependent outside options are free to participate in the mechanism. Finally, we consider the question of budget balanced implementation.

We show that an allocation rule can be implemented in an incentive compatible, individually rational and ex post budget balanced mechanism if and only if there exists an individually rational extremal transfer scheme that delivers an ex ante budget surplus.

Suggested Citation

Kos, Nenad and Messner, Matthias, Extremal Incentive Compatible Transfers (December 20, 2008). IGIER Working Paper No. 359, Available at SSRN: https://ssrn.com/abstract=1805030 or http://dx.doi.org/10.2139/ssrn.1805030

Nenad Kos

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Matthias Messner (Contact Author)

University of Cologne ( email )

Albertus Magnus Platz
Cologne, NRW 50923
Germany

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