NCJ Number
110840
Date Published
1987
Length
21 pages
Annotation
This document presents an example of a sender-receiver game, due to Farrell, to illustrate the role of incentive constraints in the design of optimal communication systems between rational individuals whose interests are not the same.
Abstract
Some noise in the communication system is essential for substantive communication. Informational and strategic incentive constraints are linear, therefore finding an optimal incentive-compatible mediation plan is a linear programming problem. The revelation principle guarantees that an optimal incentive-compatible mediation plan is also optimal among all equilibria with all possible communication systems. Participational incentive constraints replace strategic incentive constraints without moral hazard. 8 references. (Author abstract modified)