Working Paper: NBER ID: w23771
Authors: Eduardo M. Azevedo; Eric Budish
Abstract: We propose a criterion of approximate incentive compatibility, strategy-proofness in the large (SP-L), and argue that it is a useful second-best to exact strategy-proofness (SP) for market design. Conceptually, SP-L requires that an agent who regards a mechanism’s “prices” as exogenous to her report – be they traditional prices as in an auction mechanism, or price-like statistics in an assignment or matching mechanism – has a dominant strategy to report truthfully. Mathematically, SP-L weakens SP in two ways: (i) truth-telling is required to be approximately optimal (within epsilon in a large enough market) rather than exactly optimal, and (ii) incentive compatibility is evaluated ex interim, with respect to all full-support i.i.d. probability distributions of play, rather than ex post with respect to all possible realizations of play. This places SP-L in between the traditional notion of approximate strategy-proofness, which evaluates incentives to manipulate ex post, and the traditional notion of approximate Bayes-Nash incentive compatibility, which evaluates incentives to manipulate ex interim with respect to the single common-knowledge probability distribution associated with Bayes-Nash equilibrium.
Keywords: strategyproofness; market design; incentive compatibility
JEL Codes: C72; C78; D44; D47; D82
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| SPL (Z23) | agents regard societal distribution of play as exogenous to their own reports (D39) |
| SPL (Z23) | approximately optimal reporting in large markets (D40) |
| SPL (Z23) | mechanisms that are more practical in real-world applications (C63) |
| SPL (Z23) | significant shift in how mechanisms are viewed regarding their incentive properties (D47) |
| SPL (Z23) | approximately costless to impose relative to Bayes-Nash incentive compatibility (D43) |