Informational size and incentive compatibility with aggregate uncertainty. (Q1416504)

In the presence of assymetric information, incentive compatibility and Pareto efficiency often conflict. E.g. agents may benefit from misrepresenting their private information when that information is to be used in making decisions that affect them. Much research in economics ignores the issue of assymetry of information even though the assumtpion that all agents are identically informed is implausible. In a previous work, the authors of this paper studied this issue, introduced a measure of an agent's informational size, and showed that in some cases, the unavoidable inefficiencies caused by incentive problems can be made small when agents have sufficiently small informational size. In this paper, the authors progress their study and investigate the relatioship between informational size and efficiency in the presence of nontrivial aggregate uncertainty, i.e. when significant uncertainty regarding the world is present even when the information of all agents is known. They present a formal model, they discuss in general the issue of aggregate uncertainty and the difficulty that aggregate uncertainty presents when trying to identify nearly efficient incentive compatible allocations, even when the agents are informationally small.