Informational Size and Incentive Compatibility with Aggregate Uncertainty

30 Pages Posted: 3 Feb 2003

See all articles by Richard P. McLean

Richard P. McLean

Rutgers University - Department of Economics

Andrew Postlewaite

University of Pennsylvania - Department of Economics

Date Written: January 23, 2003

Abstract

In McLean and Postlewaite (2002), we analyzed pure exchange economies with asymmetrically informed agents. We defined a notion of informational size and showed that, when the aggregate information of all agents resolves nearly all the uncertainty regarding the state of nature, the conflict between incentive compatibility and (ex post) efficiency can be made small if agents have sufficiently small informational size. This paper investigates the relationship between informational size and efficiency for the case in which nontrivial aggregate uncertainty is present, i.e., when significant uncertainty about the world persists even when the information of all agents is known. We prove the existence of incentive compatible, individually rational and nearly ex post efficient allocations without assuming negligible aggregate uncertainty when agents have small informational size relative to informational variability. We further show that the conflict between incentive compatibility and efficiency asymptotically vanishes when an economy is replicated.

Note: A previous version of this paper can be found at: http://ssrn.com/abstract=297921

Keywords: Incentive Compatibility, Mechanism Design, Incomplete Information, Informational Size

JEL Classification: D51, D60, D82

Suggested Citation

McLean, Richard P. and Postlewaite, Andrew, Informational Size and Incentive Compatibility with Aggregate Uncertainty (January 23, 2003). Available at SSRN: https://ssrn.com/abstract=375620 or http://dx.doi.org/10.2139/ssrn.375620

Richard P. McLean

Rutgers University - Department of Economics ( email )

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Andrew Postlewaite (Contact Author)

University of Pennsylvania - Department of Economics ( email )

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