In any economic institution, individuals must be given appropriate incentives to share private information or to exert unobserved efforts. The revelation principle is a technical insight that allows us to make general statements about what allocation rules are feasible, subject to incentive constraints, in economic problems with adverse selection and moral hazard. The revelation principle tells us that, for any general coordination mechanism, any equilibrium of rational communication strategies for the economic agents can be simulated by an equivalent incentive-compatible direct-revelation mechanism, where a trustworthy mediator maximally centralizes communication and makes honesty and obedience rational equilibrium strategies for the agents.
Adverse selection Aumann, R. Bayesian games Capitalism Centralization Communication Correlated equilibrium Decentralization Direct-revelation mechanisms Hayek, F. von Honesty Incentive compatibility Incentive constraints Moral hazard Nash, J. Obedience Principal and agent Private information Revelation principle Sequential equilibrium Socialism Strategic-form games Trust
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