The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Incentive Compatibility

  • John O. Ledyard
Reference work entry


Incentive compatibility – a characteristic of mechanisms whereby each agent knows that his best strategy is to follow the rules, no matter what the other agents will do – is desirable because it promotes the achievement of group goals. But it is elusive because pervasive opportunities exist for misbehaviour, such as by misrepresenting preferences. This article reviews attempts to solve or at least to manage the incentive compatibility problem. Incentive compatibility provides a basic constraint on the possibilities for normative analysis, and so serves as the fundamental interface between what is desirable and what is possible in a theory of organizations.


Allocation mechanisms Auctions Bayes’ equilibrium Borda, J.-C. de Capital budgeting Central planning Cobb–Douglas functions False preferences Free rider problem Games of incomplete information Incentive compatibility Ledyard, J. O. Majority rule Market failure Mechanism design Monotonicity Nash equilibrium No-trade option Offer curves Pareto efficiency Principal and agent Public enterprise management Public goods Regulation of monopoly Revelation principle Self-selection Social welfare functions Synthetic markets Transfer pricing Tâtonnement processes von Neumann–Morgenstern utility function 

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© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • John O. Ledyard
    • 1
  1. 1.