This essay presents necessary and sufficient first-order conditions for the general design of allocation mechanisms that decentralize Pareto optimal decisions in Arrow-Hahn-McKenzie (AHM) economies. An AHM economy is distinguished from the usual Arrow-Debreu private ownership economy since the consumption or production of any commodity may induce externalities, including initially endowed commodities. Because competitive markets will not generally internalize all externalities efficiently, the mechanism design must be generalized to include a rule that computes prices for commodities appearing as initial endowments so as to define consumers' individual budget sets. A natural design criterion for the generalized allocation mechanism is to have agents communicate both price and allocation messages to the center, enlarging the message space relative to that necessary for implementing mechanisms in Arrow-Debreu economies. The larger message spaces give agents increased flexibility, which has two significant consequences: (1) the dominant-strategy property of the Demand-Revealing Mechanism in economies with only public goods, a single pure private good, and quasilinear preferences, is lost unless the center adopts an enforcement structure that suitably restricts the allocation messages that agents may transmit; (2) if an endowed commodity is not a pure private good, then the Demand-Revealing Mechanism loses the dominant-strategy property, regardless of the enforcement structure adopted or of the nature of consumers' preferences, so that the problem is exacerbated in general AHM economies.
ASJC Scopus subject areas
- Sociology and Political Science
- Economics and Econometrics