Incentive compatibility

A mechanism is called incentive-compatible (IC) if every participant can achieve the best outcome to him/herself just by acting according to his/her true preferences.

There are several different degrees of incentive-compatibility:

Every DSIC mechanism is also BNIC, but a BNIC mechanism may exist even if no DSIC mechanism exists.

Typical examples of DSIC mechanisms are majority voting between two alternatives, and second-price auction.

Typical examples of a mechanisms that are not DSIC are plurality voting between three or more alternatives and first-price auction.

A randomized mechanism is a probability-distribution on deterministic mechanisms. There are two ways to define incentive-compatibility of randomized mechanisms:

The famous Revelation principle comes in two variants corresponding to the two flavors of incentive-compatibility:

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