In this Nottingham School of Economics working paper, published in the Journal of Economic Theory, Mikhail Safronov considers situations in which a benevolent social planner aims to implement the socially efficient outcome for a group of agents. For example, a mayor of a city should decide in which area to locate a new nursery, while a CEO of a network of hospitals should decide which hospital she should send a new medical equipment to. In these examples, the social planner needs to ask agents to report their payoffs (valuations) for the object, and then the planner would allocate the object to agent(s) with the highest reported payoff. The challenge faced by the planner is to ensure that agents report truthfully and do not exaggerate.
Agents may choose to misreport their valuations since their interests differ from the social planner: each agent cares only about his own payoff, while the planner aims to maximize the total payoff of all agents. In order to induce the agents to report truthfully, in the classic Vickrey-Clarke-Groves (VCG) and d'Aspremont-Gerard-Varet (AGV) mechanisms each agent receives monetary transfers equal to the aggregate effects (externalities) that his report imposes on all other agents. These transfers align the interests of agents with those of the planner, which makes each agent report truthfully and not benefit from misreporting. In practice, the monetary transfers can be made implicit: the mayor may reallocate investment flows among different city areas, while the CEO may reallocate budget for funding research projects across the hospitals.
Even though agents do not benefit from individual misreporting in the classic mechanisms, a group of agents may jointly misreport and benefit. The problem of group deviations has been noticed in practice, in particular, in auctions bidders were observed to having jointly understated their bids. The current paper, "Coalition-proof full efficient implementation", modifies the classic mechanisms and, under certain conditions, ensures that agents do not benefit from either individual or group misreporting. Instead of aggregate externalities, in the modified mechanism each pair of agents directly compensate each other for the pairwise externalities of their reports. As a result, all externalities among the agents are essentially removed: If any agent reports truthfully, he is guaranteed to get his ex ante efficient payoff regardless of others' reports. Consequently, for each group of agents, if all agents outside the group report truthfully, the group becomes a residual claimant of the total payoff and cannot benefit from misreporting.
Journal of Economic Theory, “Coalition-proof full efficient implementation”, by Mikhail Safronov. https://doi.org/10.1016/j.jet.2018.07.009
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Posted on Wednesday 13th March 2019