Econometrica: Nov 2002, Volume 70, Issue 6
Informational Size and Incentive Compatibility
Richard McLean, Andrew PostlewaiteWe 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.
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