Chapter 28 Incentive aspects of decentralization

A resource-allocation mechanism is viewed as a gigantic information processing system. Such a system utilizes the knowledge dispersed among economic agents concerning their preferences, technologies, and endowments to determine how resources flow. The chapter discusses that information is transmitted between economic units and processed by them through computations that result in allocative decisions. Alternative mechanisms can then be compared in terms of their efficiency in processing information adequate for optimal decisions. The informational aspects of resource allocation mechanisms have been formalized and analyzed. From an informational point of view, an economic mechanism is thought of as an exchange of messages. In line with the tatonnement idea, an outcome is determined when the exchange of messages is in a stationary position. For the classical environments, in which the competitive mechanism is known to realize the Pareto correspondence, the problem has been whether there exist mechanisms that are informationally equally or more efficient but that still realize the Pareto correspondence. The realization of other correspondences has also been studied.