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Incentive Compatibility as a Nonnegative Martingale

This paper considers a dynamic Mirrleesian economy and decomposes agents'''' lifetime incentive compatibility (IC) constraints into a sequence of temporal ones. We encode the frequency and severeness of these temporal IC constraints by their associated Lagrange multipliers,showing that the accumulation of the Lagrange multipliers on the consumption part is a nonnegative martingale. It is emphasized that, distinct from the extant literature, this martingale property is derived directly from the IC constraints and so is independent of the optimization of the social planning problem. We apply our fi nding to (i) the characterization of constrained efficient intertemporal wedges in the aggregate, and (ii) the extension of the so-called immiseration to an environment more general than the extant literature.

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https://doi.org/10.20955/wp.2015.043


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