Strategy-proofness in the Large

Coauthors: Eduardo M Azevedo
Review of Economic Studies, (2019): 86, no. 1, 81-116. [PDF]

Abstract

We propose a criterion of approximate incentive compatibility, strategy-proofness in the large (SP-L), and argue that it is a useful second-best to exact strategy-proofness (SP) for market design. Conceptually, SP-L requires that an agent who regards a mechanism’s “prices” as exogenous to her report—be they traditional prices as in an auction mechanism, or price-like statistics in an assignment or matching mechanism—has a dominant strategy to report truthfully. Mathematically, SP-L weakens SP in two ways: (1) truth-telling is required to be approximately optimal (within epsilon in a large enough market) rather than exactly optimal, and (2) incentive compatibility is evaluated ex interim, with respect to all full-support i.i.d. probability distributions of play, rather than ex post with respect to all possible realizations of play. This places SP-L in between the traditional notion of approximate SP, which evaluates incentives to manipulate ex post and as a result is too strong to obtain our main results in support of SP-L, and the traditional notion of approximate Bayes-Nash incentive compatibility, which, like SP-L, evaluates incentives to manipulate ex interim, but which imposes common knowledge and strategic sophistication assumptions that are often viewed as unrealistic.