Enforcement of resource allocation mechanisms and second best industrial policy (Q760332)

Lipsey and Lancaster (1956/57) argued that their general theorem of second best vitiates any piecemeal industrial policy. The author objects that such a conclusion might go too far and that it might merely be the result of a not very realistic modelling of deviating market behaviour. He contrasts the Lipsey-Lancaster conjecture with various model variants for which distortions in one sector of the economy do not require departures from sincere - i.e., price taking - behaviour elsewhere. ''When one group of firms deviates from the rules, sincere behavior on the part of all other agents is second best optimal in the following contexts: for any mechanism and any welfare correspondence if the deviating firms are engaged in rationalizable manipulation; for any direct revelation mechanism and any welfare correspondence if the distorting firms are informationally restricted; and for the Walrasian mechanism if the messages of the deviant firms satisfy the revealed efficiency condition.'' (p. 340).