Econometrica: Nov, 2002, Volume 70, Issue 6

Informational Size and Incentive Compatibility

https://doi.org/10.1111/j.1468-0262.2002.00444.x
p. 2421-2453

Richard McLean, Andrew Postlewaite

We examine a general equilibrium model with asymmetrically informed agents. The presence of asymmetric information generally presents a conflict between incentive compatibility and Pareto efficiency. We present a notion of informational size and show that the conflict between incentive compatibility and efficiency can be made arbitrarily small if agents are of sufficiently small informational size.