Markets as Constraints: Multilateral Incentive Compatibility in Continuum Economies

Peter Hammond

The Review of Economic Studies, 1987, vol. 54, issue 3, 399-412

Abstract: A symmetric allocation in a continuum is "multilaterally incentive compatible" if no finite coalition of privately informed agents can manipulate it by combining deception with hidden trades of exchangeable goods. Sufficient conditions for multilateral compatibility are that all agents face the same linear prices for exchangeable goods, and that indistinguishable agents face identical budget sets. The same conditions are necessary under assumptions which extend those under which the second efficiency theorem of welfare economics holds in a continuum economy. Markets for exchangeable goods emerge as binding constraints on the set of Pareto efficient allocations with private information.

Date: 1987
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