The Ex Ante Incentive Compatible Core in the Absence of Wealth Effects

Consider an exchange economy in which consumers have private information (represented by their types). Issues of resource allocation in such an economy concern how the allocation is determined by the information state (profile of agents’ types). An allocation rule, in which the (possibly random) allocation depends on the information state of the economy, can then be viewed as a direct mechanism, representing some unspecified indirect mechanism (that might include auctions, boycotts, etc.). As is well explained in Holmström and Myerson (1983), there is no unique and obvious way of extending the notion of Pareto efficiency to mechanisms of such an economy. Naturally, this observation also applies to the notion of the core — which is the primary interest of the present paper. An appropriate core notion depends on whether decisions are made at the ex ante stage or the interim stage. Defining a core concept at the interim stage involves conceptual difficulties because even the player set is not clear (one player per type?), let alone the concept of characteristic function. Wilson himself, in his seminal paper Wilson (1978), proposes two different possibilities, the coarse core and the fine core. And several other core notions too have We wish to thank Enrico Minelli for numerous, extremely useful discussions on the topic of this research. Also conversations with Claude d’Aspremont, Andy Postlewaite, Roy Radner, Debraj Ray and Roberto Serrano and anonymous referees’ comments have been very helpful. Financial support from European TMR Network FMRX CT 960055 and from a Salomon research grant, Brown University, is gratefully acknowledged.