Theoretical Economics, Volume 7, Number 3 (October 2012)

Theoretical Economics 7 (2012), 609–661


Designing stable mechanisms for economic environments

Paul J. Healy, Laurent Mathevet

Abstract


We study the design of mechanisms that implement Lindahl or Walrasian allocations and whose Nash equilibria are dynamically stable for a wide class of adaptive dynamics. We argue that supermodularity is not a desirable stability criterion in this mechanism design context, focusing instead on contractive mechanisms. We provide necessary and sufficient conditions for a mechanism to Nash implement Lindahl or Walrasian allocations, show that these conditions are inconsistent with the contraction property when message spaces are one-dimensional, and then show how to use additional dimensions to achieve dynamic stability while gaining budget balance out of equilibrium.

Keywords: Mechanism design, implementation, stability, learning

JEL classification: C62, C72, C73, D02, D03, D51

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