Incomplete Information, Incentive Compatibility, and the Core

We consider an exchange economy in which agents possess private information at the time of engaging in state contingent contracts. While communication of private information is permitted, the true information state is not verifiable. The enforcement of contracts is, therefore, limited by incentive compatibility constraints. We formalize a notion of the core for such an economy. Our analysis can be viewed as an attempt to incorporate incentive compatibility in the coarse core of R. Wilson (1978, Econometrica 46, 807 816), or as an attempt to introduce coalitional contracts in the notion of incentive efficiency of B. Holmstrom and R. Myerson (1983, Econometrica 51, 1799 1819). While there are some special cases in which the incentive compatible core is non-empty, our main result shows that is not generally true. Journal of Economic Literature Classification Numbers: C71, C72, D51.