hero working papers

Extremal Incentive Compatible Transfers

Number: 359
Year: 2010
Author(s): Nenad Kos and Matthias Messner
We characterize the boundaries of the set of transfers implementing a given allocation rule without imposing any assumptions on the agent's type space or utility function besides quasi-linearity. In particular, we characterize the pointwise largest and the pointwise smallest transfer that implement a given allocation rule and are equal to zero at some prespecied type (extremal transfers). Exploiting the concept of extremal transfers allows us to obtain an exact characterization of the set of all implementable allocation rules (the set of transfers is non-empty) and the set of allocation rules satisfying Revenue Equivalence (the extremal transfers coincide).

Furthermore, we show how the extremal transfers can be put to use in mechanism design problems where Revenue Equivalence does not hold. To this end we rst explore the role of extremal transfers when the agents with type dependent outside options are free to participate in the mechanism. Finally, we consider the question of budget balanced implementation. We show that an allocation rule can be implemented in an incentive compatible, individually rational and ex post budget balanced mechanism if and only if there exists an individually rational extremal transfer scheme that delivers an ex ante budget surplus.

Keywords: Incentive Compatibility, Revenue Equivalence, Budget Balance, Mechanism Design
JEL codes: C72, D44, D82