Unidirectional incentive compatibility

Daniel Krähmer and Roland Strausz

Journal of Economic Theory, 2025, vol. 228, issue C

Abstract: We study unidirectional incentive compatibility which incentivizes truth-telling by an agent who can misrepresent private information in one direction only. In the canonical setting with quasi-linear preferences and continuous, one-dimensional private information, we show that unidirectional incentive compatibility imposes no restrictions on the allocation rule and revenue equivalence fails. Moreover, unidirectional incentive compatibility holds if and only if the change of the agent's information rent respects a lower bound based on the allocation rule's monotone envelope. With strong interdependent values or countervailing incentives, optimal screening contracts differ from optimal bidirectionally incentive compatible contracts, possibly displaying non-monotone allocations.

Keywords: Screening; Verifiability; Non-monotonicity; Failure of revenue equivalence; Implementability; Optimal contracting (search for similar items in EconPapers)
JEL-codes: D82 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:228:y:2025:i:c:s0022053125000973

DOI: 10.1016/j.jet.2025.106051

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