Overcoming Incentive Constraints

Consider an arbitrary Bayesian decision problem in which the preferences of each agent are private information. We prove that the utility costs associated with incentive constraints typically decrease when the decision problem is linked with independent copies of itself. This is established by first defining a mechanism in which agents must budget their representations of preferences so that the frequency of preferences across problems mirrors the underlying distribution of preferences, and then arguing that agents will satisfy their budget by being as truthful as possible. Examples illustrate the disappearance of incentive costs when problems are linked in a rich variety of problems, including public goods allocation, voting, and bargaining. ∗Jackson is at the Division of the Humanities and Social Sciences, California Institute of Technology, Pasadena, California 91125, USA, http://www.hss.caltech.edu/∼jacksonm/Jackson.html, email: [email protected] , and Sonnenschein is at the Department of Economics, University of Chicago, 1126 E. 59th Street, Chicago, IL 60637, USA, email: [email protected]. Financial support under NSF grants SES-9986190 and SES-0316493 is gratefully acknowledged, as is support from the University of Chicago where Jackson was visiting when this research began. We thank Zachary Cohn and Phil Reny for calling our attention to the treatment of participation constraints, Bill Zame for questions about coalitional considerations, Mahmut Erdem for written suggestions an earlier draft, Robert Veszteg as a discussant of the paper, and the participants of various seminars for helpful questions and comments. †This supercedes an earlier version of this paper entitled “The Linking of Collective Decisions and Efficiency,” Caltech Social Science Working Paper 1159, March 2003.