On the Informational Requirements of Decentralized Pareto-Satisfactory Mechanisms in Economies with Increasing Returns

This paper investigates the dimension requirements of informationally decentralized Paretosatisfactory processes in production economies with increasing returns to scale or more general types of non-convexities. We show that the marginal cost pricing (MCP) mechanism is informationally efficient over the class of non-convex production economies where MCP equilibrium allocations are Pareto efficient. We then discuss the informational requirements of realizing Pareto efficient allocations for a general class of non-convex production economies. We do so by examining the dimension of the message space of the marginal cost pricing mechanism with transfers. Since the set of marginal cost pricing equilibrium allocations with transfers contains Pareto efficient allocations as a subset for every economy under consideration, Pareto efficient allocations can be realized through the MCP mechanism with transfers, which is informationally decentralized and has a finite-dimensional message space. This result is sharply contrasted to the impossibility result given in Calsamigla (1977). Journal of Economic Literature Classification Number: D5, D61, D71, D83, P51. ∗Financial support from the Private Enterprise Research Center at Texas A&M University is gratefully acknowledged.