Strategy-Proofness, Investment Efficiency, and Marginal Returns: An Equivalence

Abstract

Drawing on classical insights from mechanism design, we show that ex post efficient mechanisms induce agents to make efficient ex ante investment choices if and 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