Incentive compatibility

Incentive compatibility is a property of a rule or contract under which each participant benefits from choosing the intended action rather than misreporting information or taking another action.

Mechanism design: The study of designing rules and institutions to achieve desired outcomes when participants act strategically. It supplies the framework for constructing rules whose incentives align with intended behavior.
Game theory: The mathematical study of strategic interaction among decision-makers. Incentive compatibility evaluates choices made while anticipating other participants' behavior.
Vickrey auction: A sealed-bid auction in which the highest bidder wins and pays the second-highest bid. Under standard assumptions, bidding one's value is a dominant strategy in this auction.
Efficiency: A property of an allocation that leaves no feasible change capable of improving someone without harming another. An incentive-compatible rule need not produce an efficient allocation.
Revelation principle: A result showing that, under specified conditions, mechanisms can be analyzed as if participants truthfully report their private information. It lets designers focus on truthful-report mechanisms when checking incentive compatibility.
Private information: Information known to one participant but not fully available to others in an interaction. A participant's hidden type is often what makes truthful reporting a design problem.
Myerson auction: An optimal auction design for a seller facing bidders with private values drawn from known distributions. Its allocation and payment rules are chosen subject to incentive and participation constraints.
Pareto efficiency: An outcome is Pareto efficient if no feasible alternative makes someone better off without making someone else worse off. It evaluates outcomes, whereas incentive compatibility evaluates participants' strategic choices.
Dominant-strategy incentive compatibility: A condition under which truthful reporting maximizes a participant's payoff regardless of other participants' reports. It is a strong form of incentive compatibility that requires truth-telling to work against every possible report profile.
Utility: A numerical representation of how an outcome ranks according to a decision-maker's preferences. Compatibility is assessed by comparing the utility of intended and alternative actions.

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