Incentive Compatible Transfers

In a quasi-linear environment we characterize the boundaries of the set of transfers which implement a given allocation rule (extremal transfers). Doing so allows us to generalize and unify several existing results of the mechanism design literature. More specifically, our approach delivers a characterization result for the set of implementable allocation rules. Second, we obtain an exact characterization of the allocation rules which satisfy Revenue Equivalence. Third, we show that in problems of optimal mechanism design it is often without loss for the designer if he restricts his attention to the extremal transfer rules. That is, we show how mechanism design problems can be simplified even when the Revenue Equivalence principle does not apply. After proving our main results for general environments in the first part of the paper, we consider two more specific and very commonly studied settings in the second part of the paper, namely, a single unit auction framework and a bilateral trade setup. We use the first environment to show that our characterization of the extremal transfers takes a particularly convenient form when types are unidimensional. In the bilateral trade setting our tools allow us to give a simple characterization of the conditions under which agents will voluntary engage in efficient trade which applies whether or not Revenue Equivalence holds. JEL Code: C72,D44,D82.