Path-monotonicity and incentive compatibility

Abstract

We study the role of monotonicity in the characterization of incentive compatible allocation rules when types are multi-dimensional, the mechanism designer may use monetary transfers, and agents have quasi{linear preferences over outcomes and transfers. It is well-known that monotonicity of the allocation rule is necessary for incentive compatibility. Furthermore, if valuations for outcomes are either convex or difierentiable functions in types, revenue equivalence literature tells that path-integrals of particular vector flelds are path{independent. For the special case of linear valuations it is known that monotonicity plus path-independence is su‐cient for implementation. We show by example that this is not true for convex or difierentiable valuations, and introduce a stronger version of monotonicity, called path-monotonicity. We show that path-monotonicity and path-independence characterize implementable allocation rules if (1) valuations are convex and type spaces are convex; (2) valuations are difierentiable and type spaces are path-connected. Next we analyze conditions under which monotonicity is equivalent to path{monotonicity. We show that an increasing difierence property of valuations ensures this equivalence. Next, we show that for simply connected type spaces incentive compatibility of the allocation rule is equivalent to path{monotonicity plus incentive compatibility in some neighborhood of each type. This result is used to show that on simply connected type spaces incentive compatible allocation rules with a flnite range are completely characterized by path{ monotonicity, and thus by monotonicity in cases where path{monotonicity and monotonicity are equivalent. This generalizes a theorem by Saks and Yu to a wide range of settings.