Strategy-Proofness, Investment Efficiency, and Marginal Returns: An Equivalence

John William Hatfield; Fuhito  Kojima; Scott Duke Kominers

Working Paper | 2015

Strategy-Proofness, Investment Efficiency, and Marginal Returns: An Equivalence

by John William Hatfield, Fuhito Kojima and Scott Duke Kominers

Abstract

We show that a mechanism induces an agent to make efficient ex ante investment choices if and only if it rewards that agent with his marginal surplus; additionally, for an ex post efficient mechanism, these properties are equivalent to strategy-proofness for the agent. Our results extend to settings with uncertainty; moreover, they have analogs for mechanisms that are only approximately efficient and approximately incentive compatible. Among other applications, our results imply both that under the worker-optimal stable mechanism, workers are incentivized to make efficient human capital investments before entering the labor market, and that second-price auctions induce efficient bidder participation.

Keywords: Strategy-proofness; Investment efficiency; Providing marginal rewards; Vickrey-Clarke-Groves mechanisms; Mechanism design; Market Design; Human Capital;

Language: English

Format: Print

SSRN

Citation:

Hatfield, John William, Fuhito Kojima, and Scott Duke Kominers. "Strategy-Proofness, Investment Efficiency, and Marginal Returns: An Equivalence." Working Paper, January 2015.

This paper develops a class of equilibrium-independent predictions of competitive equilibrium with indivisibilities. Specifically, we prove an analogue of the “Lone Wolf Theorem” of classical matching theory, showing that when utility is perfectly transferable, any agent who does not participate in trade in one competitive equilibrium must receive her autarky payoff in every competitive equilibrium. Our results extend to approximate equilibria and to settings in which utility is only approximately transferable.

Hatfield and Kominers (2012) introduced a model of matching in networks with bilateral contracts and showed that stable outcomes exist in supply chains when firms' preferences over contracts are fully substitutable. Hatfield and Kominers (2012) also asserted that in their setting, full substitutability is equivalent to the assumption that all indirect utility representations of each firm's preferences are quasisubmodular; we show here that this claimed equivalence result does not hold in general. We show instead that full substitutability is equivalent to weak quasisubmodularity of all indirect utility representations.

Faculty & Research

Strategy-Proofness, Investment Efficiency, and Marginal Returns: An Equivalence

Abstract

Citation:

About the Author

More from the Author