Evolutionary Implementation and Congestion Pricing

We consider an implementation problem faced by a planner who manages a roadway network. The problem entails both hidden information and hidden actions. We solve the planner's problem by introducing a new class of mechanisms and a new notion of implementation. The mechanisms, called price schemes, attach transfers to the available routes; they do not involve direct revelation. The method of implementation is evolutionary, requiring that players who follow any reasonable myopic adjustment process eventually learn to behave as the planner desires. We show that efficient behavior can be guaranteed using simple, decentralized price schemes. JEL Classification Numbers: C61, C72, C73, D62, D82, R41, R48. * I thank Eddie Dekel, James Dow, Jeff Ely, Bart Lipman, Nolan Miller, Larry Samuelson, Jeroen Swinkels, three anonymous referees, and seminar audiences at Wisconsin, the Royal Institute of Technology (Stockholm), the Game Theory Society World Congress (Bilbao) and the Econometric Society World Congress (Seattle) for their comments. Early versions of some results in this paper can be found in Chapter 4 of my doctoral dissertation (Sandholm (1998)). Financial support from a State Farm Companies Foundation Dissertation Fellowship and from NSF Grant SES-0092145 is gratefully acknowledged.