Strategy-Proofness, Investment Efficiency, and Marginal Returns: An Equivalence
114 Pages Posted: 5 Jan 2015 Last revised: 10 Apr 2017
Date Written: June 9, 2016
Classical insights from mechanism design imply that ex post efficient mechanisms induce agents to make efficient ex ante investment choices only if they are strategy-proof. For mechanisms that fail to be exactly strategy-proof and/or efficient, we derive a correspondence between the degree of failure of strategy-proofness and/or efficiency and the degree of failure to induce efficient investment. Our results extend to settings with uncertainty. Our results imply both that the worker-optimal stable mechanism incentivizes workers to make efficient human capital investments before entering the labor market, and that uniform-price and double auctions induce approximately efficient investment in large markets.
Keywords: Strategy-proofness, Investment efficiency, Providing marginal rewards, Vickrey-Clarke-Groves mechanisms, Mechanism design
JEL Classification: C78, D44, D47, D82
Suggested Citation: Suggested Citation