Why does the incentive compatibility constraint bind. Cash flow incentive compatibility debt financing incentive constraint principal agent. The literature on incentive compatibility in general economic environments has so far. Curve high type reservation utility incentive compatibility constraint.
This video walks you through an example of mechanism design problem from hal varians microeconomics textbook where you set up both participation constraints and incentive compatibility constraints. Thus, mechanism design normative economics relative to game the ory. Although adam smith amply confirmed this more than two hundred years ago in his analysis of sharecropping contracts, only in recent decades has a theory begun to emerge to place the topic at the heart of economic thinking. Economics has much to do with incentives not least, incentives to work hard, to produce quality products, to study, to invest, and to save. A mechanism is called incentivecompatible ic if every participant can achieve the best. Local incentive compatibility implies global incentive compatibility.
It seems reasonable to assume that the social planner has access to a more direct means of achieving redistribution if that is an objective. Incentive compatibility constraints as an explanation for. Incentive compatibility news newspapers books scholar jstor june 2019 a mechanism is called incentivecompatible ic if every participant can achieve the best outcome to themselves just by acting according to their true preferences. Designing an incentivecompatible contract springerlink. The balance of t follows directly from its definition. Lectures in contract theory meet the berkeleyhaas faculty. Ir hereafter as well as the incentive compatibility constraints ic.
These keywords were added by machine and not by the authors. The idea behind the incentive compatibility constraint is that the expected utility when doing the high effort level needs to be as least as large as the one the agent would obtain from doing the low effort level. This process is experimental and the keywords may be updated as the learning algorithm improves. Incentive compatibility on the blockchain springerlink. Incentive compatibility news newspapers books scholar jstor june 2019 learn how and when to remove this template message. In economics, incentive compatibility is used as one of two important constraints in an optimization problem in which a person such as a firm owner must rely. If assumptions 1 and 2 hold and all the local incentive constraints are satisfied, then the mapping m qr. One of the most important problems in modern economics is concerned with the.