Communication Complexity and Mechanism Design

The curse of the Revelation Principle is that it leads us to focus on unrealistic mechanisms in which agents report all private information to the principal, who then makes all decisions centrally. This is not true when communication costs are introduced. In that case, partial communication of information, sequential back-and-forth conversations, and decentralization of decisions become part of optimal mechanisms. This paper looks at the interplay between the incentive constraints and the communication constraints. When can they be separated so that, for example, one can separately study the incentive compatibility of a social choice rule and the minimum-cost communication protocol that realizes the social choice rule? (JEL: D82, C72) (c) 2007 by the European Economic Association.