Communication and Prices in

Economic Mechanisms

Ilya Segal
 Four lectures
1. Communication costs in economics
2. Communication and prices in social choice
3. Market design applications
4. Communication cost of incentives
Communication costs in
economics
 “Market Design” Problems
• Find allocations satisfying social goals when agents
have private knowledge (e.g. of own preferences)
– Combinatorial auctions: FCC spectrum, landing slots, …
– Matching: candidates to jobs, internships, …
– Kidney exchange
• Incentives?
– can be verified with a Direct Revelation Mechanism
(e.g., Vickrey-Clarke-Groves)
• But full revelation is costly and is avoided in most
real-life mechanisms
• Instead: sequential mechanisms – e.g., iterative
auctions, interviews,… - to grope for equilibrium
 Hayek’s (1945) Critique of Lange-
Lerner socialism
• Knowledge of “particular circumstances of
time and place” too enormous to transmit to
a central planner
 “Ultimate decisions must be left to the
people familiar with these circumstances”
• Information needed to coordinate individual
actions can be summarized in prices
• “Nobody has yet succeeded in designing an
alternative system”
 Costs of Revelation
1. Communication costs:
– E.g., combinatorial auctions: 2L bundle values
– Measured in bits (communication complexity)
or real numbers (message space dimension)
2. Cost of agents evaluating own preferences
– E.g., job interviews, flyouts, …
3. More deviations when commitment is
imperfect (short-term contracts, cheap talk)
– E.g., revealed info may be exploited by
auctioneer or competitors in the future
 Communication
• N = set of agents, X = set of outcomes
• Agent i privately observes his “type” Ri 2 Ri
• State: R = (R1, …, RN) 2 R1£…£ RN = R
• Want to implement choice rule F: R  X
• F(R) = “optimal” outcomes in state R
• Sequential communication may save over simultaneous
• Communication Protocol =
1. Extensive-form message game
2. Outcomes assigned to terminal nodes
3. Agents’ strategies (type-contingent)
• Do not require incentive-compatibility (e.g., agents could be
computers)
 Communication
Agent 2’s type
b a

Agent 1’s type

2 a b
1 d
1 2 c d c d
d a
a

• State space partitioned into product sets

• In every state R must implement an
outcome in F(R)
• Characterizing such protocols is hard
 Verification (Nondeterminism)
• Omniscient oracle knows state R but must
prove to an outsider that x 2 F(R)
• Announces message Agent 2’s type
m2M
• Each agent accepts or
rejects m based on his x
own type Agent 1’s type m
• Acceptance by all
agents verifies x 2 F(R)
• Verification in each
state R
 Verification: Formalism
• Protocol Г = M, μ, h 
• M is a message space
• μ: R  M is a message correspondence s.t.
“Privacy Preservation:”
μ(R) = \i μi(Ri) R
• h: M  X is outcome function
• Г verifies F if   h(μ(R)) ½ F(R) R
• Г fully verifies F if h(μ(R)) = F(R) R
 Why Verification?
• Any deterministic protocol can be verified by
oracle sending messages in agents’ stead (i.e.,
M = terminal nodes of the protocol)
 verification costs · communication costs
• Economic example – Walrasian equilibrium:
message = (allocation, prices)
• Steady state of a communication process
(e.g., tatonnement, auctions, deferred
acceptance algorithms)?
Measuring communication costs
• Discrete: number of bits (communication
complexity)
– E.g., oracle needs log2M bits to encode message
• Continuous: number of real numbers
– How many reals are needed to encode a message from
M – dimension of M?
• Agents’ costs of evaluating own “types”
– E.g., number of job interviews, dates, sorting…
• “Privacy” – reducing revelation of agents’ types
E.g., revealed info may be exploited in the future
 Measuring Dimension: Problem
• Intuition: dimension of M = “number of real
numbers” needed to describe points in M

• Problem - Peano space-filling

curve: [0,1]  [0,1]n
• Inverse Peano function describes
[0,1]n with one number
• Note: Peano function is
continuous (its inverse is not)
 Questions:
1. How to define the dimension of a “space”?
2. Which transformations preserve this
dimension?
Two classes of approaches:
• Topological dimensions
• Metric dimensions
Topological dimension - “inductive”
• “We say that space is 3-dimensional
because the walls of a prison are 2-
dimensional”
• M is topological space (defined “open sets”)
• ind()= - 1
• “ind M  k” if every point in M lies in an
open set whose boundary has “ind  k – 1”
• ind M = min. integer k s.t.“ind M  k”
 Preservation of topological
dimension
Proposition: If f: X  Y is a continuous 1-to-1
function then ind Y  ind X
• Proof idea: f(X) has fewer open sets than X
– “harder to imprison” points
• Could have ind Y > ind X if f -1 is not
continuous (e.g., Peano function)
Metric dimension (ball covering)
• M is a metric space (has distances)
• NM() = min. number of -balls needed to cover M
• E.g. N [0,1]n () ~ A  (1/)n
• In general, dim M = limsup+0 ln NM()/ln (1/)
– To cover unbounded S could allow to vary ball size
(“Hausdorff dimension”)
• dim M  ind M:
– M = irrational numbers in [0,1]  dim M = 1, ind M = 0
• dim M may be “fractal”
– e.g., dim (China’s coastline) = 1.16
 Interpretation of metric dimension:
Approximation with bits
• NM () = min. number of messages needed to
approximate points from M within  (“discretize”)
• log2NM () = min. number of bits needed to encode
such messages
• Thus can approximate points from M within  using ~
dim M  log2(1/) bits as +0
• Thus dim M relates to communication complexity of
approximating M with bits
• But: dim M may not represent the hardness of
approximation for a fixed  > 0, or for +0 slowly as
other parameters grow (will have example)
Preservation of metric dimension
• Proposition: If f: X  M is a 1-to-1 function and f
-1
is Lipschitz
(i.e., A >0: dist(x, x)  Adist(f (x), f (x)) x,x)
then dim M  dim X
• Proof: f “does not shrink” distances except by a
factor
• Continuity of f -1 not enough (e.g. let f be inverse
Peano)
“Fooling set” dimension bounds
• Rf  R is a fooling set if R,R  Rf,
RR  (R) (R) = 
• Proposition: Suppose Rf is a fooling
set.
• (a) If  has a (local) continuous
selection, ind M  ind Rf.
• (b) If  has a (local) selection whose
inverse is Lipschitz continuous, then
dim M  dim Rf.
 So, which dimension is better?
• Use topological dimension, restrict  to have a
continuous selection?
– Mount-Reiter, Walker, etc.
– Rules out discrete messages (e.g., indivisible
allocations)
• Use metric dimension, restrict  to have a selection
whose inverse is Lipschitz continuous?
– Hurwicz 1977, Nisan-Segal
– Interpretation: small errors in message transmission
should not yield large mistakes
– Need not rule out any mechanisms - can define a
“right” metric on any M to have Lipschitz continuity
– Allows “fast” discrete approximations
Lecture 2: Communication and
Prices in Social Choice
Hayek’s (1945) Critique of socialism
• Knowledge of “particular circumstances of
time and place” too enormous to transmit to
a central planner
 “Ultimate decisions must be left to the
people familiar with these circumstances”
• Information needed to coordinate individual
actions can be summarized in prices
• “Nobody has yet succeeded in designing an
alternative system”
 Is it necessary to use prices?
• Fundamental Welfare Thms: Supporting prices (1)
are sufficient for efficiency and (2) can be constructed
with full information about the economy
– But then can compute efficient allocation directly
• Hurwicz, Mount-Reiter: In a convex economy with
distributed preference information, Walrasian
equilibrium is “dimensionally minimal” among
“regular” mechanisms verifying efficiency
• Did not rule out mechanisms that don’t use prices
• Inapplicable to market design:
– Nonconvexities, discrete decisions
– Other goals: approximation, group stability, fairness, …
– Other communication costs: bits, evaluations, …
 Informativeness: Partial Order
• Message m is less informative than message m'if m'
accepted  m accepted.
• m is a minimally informative message verifying
outcome x if any less informative message verifying
x is equivalent to m.
x
m

m'
• Such messages minimize communication costs:
– Size of M - number of bits or reals to encode a message
– Preference evaluation costs, privacy loss, etc.
Allocate an Object between 2 Agents
Agent 2’s value
p
• Messages
2
Agent 1’s value

m verifying “2”
1
p • Minimally
informative
messages
verifying “2”
• Equivalent to announcing supporting equilibrium price p
• Each p must be used (in a diagonal state)  need
infinitely many messages (continuum)
 General Results
• Characterize social choice problems (social goals
and preference domains) for which it is necessary
to find supporting prices
• Algorithm deriving the form of prices (budget sets)
that verify solutions to a given problem with
minimal information
• Price space yields communication cost
• Selected applications:
– Pareto efficiency in convex economies
– Exact or approximate surplus-maximization
– Stable many-to-one matchings
• Extra communication cost of incentives
 Social Choice Problem
• N = set of agents, X = set of outcomes
• Agent i’s “type” is a preference relation Ri over X
• State: R = (R1, …, RN) 2 R1£…£ RN = R
• Choice rule F: R  X
• F(R) = “optimal” outcomes in state R
fully 
• Protocol verifies F if R 2 R x 2 F(R) m
2 M that is acceptable in state R and verifies x
 Verification by budget equilibria
L(x, R2)
x

B2

• Oracle’s message: B1 L(x, R1)

– Proposed outcome x X
– Budget set Bi  X for each agent i
• Agent i accepts iff x is his optimal choice from Bi
i.e., Bi  L(x, Ri) {y 2 X: x Ri y}
• Acceptance by all agents (equilibrium) must verify x
 Verification by budget equilibria
L(x, R2)
x R
 

B2

B1 L(x, R1)
• Full verification: R 2 R x 2 F(R)
 budget equilibrium (B,x) verifying x in state R
• E.g., Fundamental Welfare Theorems: Any
Pareto efficient allocation in a convex economy
can be verified with a Walrasian equilibrium
– Extend to other social choice problems?
 Verification by budget equilibria
L(x, R2)
x R' 
R
 

B2

B1 L(x, R1)
• Larger budget sets  more informative equilibrium
Definition: F is monotonic if RR xF(R)
R'R, L(x, Ri)  L(x, Ri') i  xF(R').
Theorem: F is fully verified with a budget
equilibrium protocol  F is monotonic.
Williams (1986), Greenberg (1990), Miyagawa (2002)
 Necessity of budget equilibria?
L(x, R2)
x mR
 

B2

B1 L(x, R1)
• Knowing R, could compute an optimal outcome
directly, without using supporting budget sets
• Can we construct budget equilibrium not just with
full info, but from any verifying communication?
 Necessity of budget equilibria?
L(x, R2)
x m
ÅR2m L( x, R2) =
B2

ÅR2m L( x, RB1)1 = L(x, R1)

Definition: F has the Budget Revelation Property if
for any message verifying x there exists a less
informative budget equilibrium (B,x) verifying x.
Theorem: F satisfies BRP  F is Intersection-
Monotonic (stronger than monotonicity).
 Some choice rules satisfying BRP
• Pareto efficiency
• Approximate Pareto efficiency
• The core
• Stable matching
• Envy-free
• More generally: Any “CU” rule described
by coalitions’ blocking sets (x,S) X
–outcomes coalition S N can use to
block candidate outcome x 2 X
– x F(R)  no coalition S N has a strict
Pareto improvement over x within (x,S)
 Venn Diagram

M = verified with budget protocol

IM = BRP Pareto
CU  
Approx.
Core Pareto
 

No-Envy
 

 
 Social Choice Rules: Boolean
Representation
• “x F(R)” can be written as a boolean formula with
R atoms {z Ri y}y,z X, i  N describing R
– Using “conjunctions” ( = AND), “disjunctions” ( =
OR), “negations” ( = NOT)
• F is monotonic  need only use atoms {x
Ri y}y X, i  N , no negations
•  can be written in “Monotone Disjunctive
Normal Form” =    ( (i,y) (x Ri y))
• RF-1(x), MDNF can be verified with one of
its clauses  - a “budget equilibrium” (cf. Theorem
1)
 Restrictions imposed by IM

• Equivalently, for monotonic rules, “x F(R)” can

also be written in “Monotone Conjunctive Normal
Form” =    ((i,y) (x Ri y))
• F is Intersection Monotonic  can be written as
MCNF whose disjunctive clauses  don’t contain
(x Ri y)  (x Ri z) with y  z
• Intuition: if “x F(R)” is preserved by taking y or
z individually out of L(x,Ri), should be preserved
by taking out y and z together
 Restrictions imposed by CU
• F if CU  “x F(R)” can be written as MCNF = 
  ((i,y) (x Ri y)) s.t. each clause  has a single y
– i.e.,  takes the form iS (x Ri y)
– Interpretation: coalition S does not want to block x with y
– i.e., does not contain (x Ri y)(x Rj z) with y  z
• Characterizes monotonic choice rule that are
“binary,” which means
– calculate social relation Σ between x,y from agents’
preferences x Ri y (e.g., Σ = “not blocked by”) – IIA
– Choose maximal elements in Σ from X
– Note: if we required Σ to be rational we would hit Arrow’s
Impossibility Theorem
Lecture 3: Market Design
Applications
 Necessity of budget equilibria:
L(x, R2)
x
m
B2

B1 L(x, R1)
Definition: F has the Budget Revelation Property if for any message
verifying x there exists a less informative budget equilibrium (B,x)
verifying x.
Theorem: F satisfies BRP  F is Intersection-Monotonic.
• Stronger than monotonicity, but satisfied by many choice rules –
e.g. Pareto, approx. Pareto, core, stability, envy-free – all CU
rules.
 Intuition
• Social goals “congruent” with private
preferences  minimize communication by
asking agents to act on their knowledge
selfishly within budget sets (cf. Hayek)
• Design budget sets to coordinate choices and
attain social goals with minimal
communication
 Minimally Informative Verifying Messages
L(x, R2)
R
 
m
B2 R
x

B1 L(x, R1)
• Budget Revelation Property  use budget equilibria
• Minimize informativeness = shrink budget sets
 “critical” states R:
Bi = L(x, Ri) = \ R'i Ri: xF(R'i, R-i) L(x, R'i)i
• In such R, (B1,…, BN, x) is a unique budget equilibrium verifying x
(up to equivalence)
 Market Design: Roadmap
• Use budget-shrinking algorithm to construct min.
informative budget equilibria (B,x) verifying x
• If Bi = L(x, Ri) i for some R 2 R (“critical state”) 
minimal message space for full verification of F
• To bound below simple verification cost - use tricks,
e.g.,
– Restrict to states R in which F(R) is a singleton
– Construct a fooling set whose states can’t share a verifying
budget equilibrium
• Verification cost very high  problem is hopeless
• Verification cost low  Can it be achieved in a
deterministic, incentive-compatible protocol?
 Application: Pareto Efficiency in
Smooth Convex Exchange Economies
• L goods; Ri over xi 2 R+L convex, smooth,
with a positive utility gradient
R1

B2
R2 x

B1
Proposition. m is a minimally informative
message verifying the Pareto efficiency of
an interior allocation in a smooth convex
economy  m is equivalent to a
Walrasian equilibrium.
• Any such equilibrium (B, x) is a unique
Walrasian equilibrium supporting x
 Number of variables for full verification =
(N-1)L quantities + (L – 1) prices
 Verification Cost
• Fix endowments  (N-1)(L-1) quantities + (L – 1) prices =
N(L-1) numbers
• Can we verify Pareto efficiency with fewer numbers?
• Fooling set of Cobb-Douglas economies (Hurwicz):
– Utilities ui (xi) = Πl xilαil ; with Σl αil = 1 for all i
– Described with N(L -1) parameters
• FOC for (p, x) being a Walrasian eqm:
αil/αik = (pl xil ) /(pk xik) for all l,k,I
 No two distinct Cobb-Douglas economies share a Walrasian
eqm  give a “fooling set” for Pareto efficiency
• What about deterministic communication?
– “Tatonnement” converges fast in some but not all economies
 Pareto Efficiency with Numeraire
• x = (k, t1,…,tN ); feasibility: Σi ti = 0
• Ri 2 Ri given by quasilinear utility ui(k)+ti
• Efficiency = maxk2K Σi ui(k) (total surplus)

R1 B2
t2 R 2

x
t1
B1
k
Proposition. m is a minimally informative
message verifying efficiency with numeraire
 m is equivalent to a price equilibrium with
personalized nonlinear prices p 2  NK s.t. i
pi (k) = const on k 2 K.
• Each such price must be used in the “critical”
state where Σi ui(k) = const on k 2 K
  Cost = (N – 1)(K – 1) real numbers = full
revelation of N – 1 agents’ valuations
• Combinatorial auctions: N = 2, K = 2L 
communication cost ¸ 2L –1 numbers
 Stable Many-to-one Matching
• N consists of firms (F) and workers (W)
• Matching x = binary relation from F to W in
which a worker matches with at most one
firm
• Ri 2 Ri depends only on i’s partners
F

W
 Stable Matching
• Matching is stable if these coalitional
deviations are not strictly Pareto improving:
(i) Firm hires some new workers (and fires some)
(ii) Worker quits to become unemployed
– This describes an IM choice rule

W
Minimally Informative Equilibria
• A worker’s budget set described by available firms
• A firm’s budget set: available groups of workers
• In a minimally informative equilibrium verifying
stability, the groups consist of
– The firm’s current workers
– Workers who don’t have the firm in their budget sets

 firms’ budget sets, non-combinatorial

F

W
Lemma. m is a minimally informative message
verifying the stability of matching x  m is
equivalent to a partitional equilibrium, in which
each off-equilibrium match is in either partner’s
budget set, but not both.
• Any such equilibrium (B, x) is a unique partitional
equilibrium supporting x in state R in which Bi =
L(x, Ri) i.
 Cost of full verification = 2FW bits
• Cf. cost of describing a match x = FW bits
• Cf. describing firms’ preferences over 2W groups
=log2(2W)! ~ W 2W bits
• Two questions:
1. Is the cost of verification any lower?
2. Is the deterministic communication cost higher?
 Verification cost is the same:
• Take any partitional equilibrium (B, x), and “critical state” R
s.t. Bi = L(x, Ri) i
• Further restrict R to ensure that x is unique stable match:
– Each i strictly prefers his current match within Bi
– Each i strictly prefers quitting to getting a new partner from Bi
• Can’t have a stable match x ≠ x:
– i gets a new partner from Bi  i would quit
– i gets a new partner j  Bi  i 2 Bj  j would quit
– x  x  x is in all budget sets  a coalition would block x by x
  (B, x) must be used for verification in state R
  Communication cost = 2FW bits
• Same logic works for 1-to-1 matching (cost ~ FW bits)
• This bounds below deterministic communication cost
 Deterministic Communication
• This lower bound is almost achieved for substitutable
preferences by Gale-Shapley deferred acceptance
algorithm:
(· 2FW steps: matches offered, rejected)
• Exponentially less than full revelation of firms’
combinatorial preferences
• The algorithm also minimizes evaluation costs of the
responding side (whose budget sets are minimized)
– With uniformly drawn preferences, on average only 1/3 of
potential partners evaluated
 Determinism vs. Nondeterminism
• Recall: Deterministic CC in bits ·
nondeterministic CC in bits
• Gap is at most exponential – e.g., try each
of the M oracle’s messages for acceptance
instead of encoding with log2M bits
• Gap is small in some cases: e.g., matching
or auctions with substitute preferences -
monotonic “tatonnement” converges
quickly
• But there are IM rules with exponential gap
 Example of Exponential Gap
• 2 agents hire 2 out of 3m workers
• Agent 1 is happy if the hired workers share a language
• Agent 1 knows privately each worker’s language
• Public knowledge: all workers are monolingual, m
languages spoken by a pair of workers, and m languages
spoken by a single worker.
• Agent 2 knows privately 2m+1 “capable” workers
• Agent 2 is happy 1 if both hired workers are capable
• Social goal: make both agents happy. - CU, IM.
• Such pair always exists and can be verified by its
announcement - 2 log2 (3m) bits
• But deterministic CC is asymptotically proportional to m
– Equivalent to the “Pair-Disjointness.problem”
 Average-Case Goals
• E.g., approximate expected surplus, given a probability
distribution over states
• Example: discrete public good, N agents’ i.i.d. values vi
2{0,1}, Pr{vi = 1} =Cost = c < N.
• N large  building is efficient with prob. 1
• Verifying efficiency requires finding c agents to charge
Lindahl price =1, takes ~ c logN bits
– for  -approximation guarantee, (k-) log2N bits
 “Government solution” approximates expected efficiency
without any communication, prices (cf. Groves-Hart)
• Another Example: with many decisions, “authority” may
approximate expected efficiency when finding prices
would take exponentially longer (cf. Coase, Simon)
• Examples known in which expected-surplus approximation
is hard to attain – e.g., combinatorial auctions
 Economics without Incentives?
• Thought experiment: people are honest.
Would basic economics institutions (markets,
firms) remain?
• Minimize communication by asking people to
pursue self-interest guided by prices
 Scope of “market design”
 Required price space
Lower bounds on communication and evaluation
costs
• Average-case goals may yield non-market
institutions (governments, firms)
 Lecture 4:
Communication Cost of Incentives
 So far
• Can calculate communication costs of many
economic problems
– E.g., use the Budget Revelation Property, construct
min. informative verifying budget equilibria
• In some cases, cost is prohibitive,  cost of full
revelation of preferences
– E.g., combinatorial auctions with general valuations –
need whole combinatorial price space
• In other cases, cost is manageable:
– E.g., auctions or matching with “substitute” preferences
– enough to use individual prices/budget sets
• Can we then construct an incentive-compatible
mechanism?
 Incentives and Prices
• “Budget set” in mechanism design: set of agent’s
attainable outcomes
– E.g. Menus – “Taxation Principle”
• Incentives: agent maximizes utility within his
budget set
• Remarkable: even with no incentives (truthful
agents), must still describe budget sets, ask agents
to maximize own utility within them
– For social goals that are “congruent” with preferences
 Nash implementation
• Agents’ preferences commonly known (but not to designer)
• Mechanism g: M1…  MN  X
• (Full) implementation: Set of Nash Equilibria = F(R) R 2 R
• m is NE of g  (B, x) is a budget equilibrium, where x=g(m),
Bi = {g(mi,m-i): mi 2 Mi} i
  A Nash protocol is a budget protocol
• Theorem 1  Any Nash implementable F is monotonic
• Even with symmetric info, selfishness  reveal budget sets:
• Proposition: Communication cost of Nash implementation 
communication cost of full realization
– May not hold for extensive-form mechanisms (in which strategies m
are not revealed)
 Communication Cost of (1-stage)
Nash implementation
• Monotonicity  Nash implementability
(not every budget equilibrium protocol is a Nash protocol)
• But is “almost” sufficient:
• Definition: F has No Veto Power (NVP) if |{i:
xRiy y 2 Y }|  N – 1  x 2 F(R).
– Trivial in economic applications with N  3
• Maskin (1977): Any monotonic NVP choice rule is Nash
implementable
• Proposition: If F is IM and NVP, communication
cost of Nash implementation N
(communication cost of full realization) + log2N.
 Proof: Mechanism
• Let  = minimal space of budget equilibria fully verifying F
• Each agent i announces (Ei, li), where Ei = (B1i,…, BNi,
xi) 2 , li 2 {1,…, N}
1. E1 =…= EN = (B1,…, BN, x)  implement x
2. Ej = (B1,…, BN, x) ji and xi  Bi  implement x
3. Ej = (B1,…, BN, x) ji and xi 2 Bi  implement xi
4. Otherwise implement xi for i = (j lj ) modN + 1
• x 2 F(R)  all agents announcing the same equilibrium (B1,
…, BN, x) 2  in state R is a NE
• Case-1 NE: (B1,…, BN, x) verifies x, is a budget eqm in state R
 x 2 F(R)
• Other cases: all but (perhaps) one agent could deviate to Case
4 to get his best outcome  by NVP, x 2 F(R)
• May further reduce cost e.g. by letting Bi be
announced only by agent i modN+1
– McKelvey, Reiter-Reichelstein
• Key: each agent’s budget set must be determined
by others’ messages – prevent “price
manipulation”
• With private information, incentives require
constructing Bi without using i’s info  extra
communication cost
 Communication Cost of Selfishness
(with Ron Fadel)
Incentive-Compatibility with private information:
1. Ex Post IC: Each agent’s strategy is optimal
given others’ even if he knew other agents’ types
– Weaker than Dominant-Strategy IC: in an extensive
form, don’t consider others’ unused strategies
2. Bayesian IC: Each agent’s strategy is optimal
given others’ on expectation over their types
Communication Cost of Selfishness
• CCS = (Minimal Communication Cost of
an Incentive-Compatible mechanism) -
Communication Complexity
• Related work: Reichelstein 1984, Green and
Laffont 1987, Lahaie and Parkes 2004,
Feigenbaum el al. 2004, Johari 2004
 Setup
• Quasilinear payoffs: ui(y)+ti, with y 2 Y
• ui 2 Ui ½ Y - private type of agent i
• Types drawn independently (basic model)
• Decision function f: U1£…£ UI ! Y
• Don’t care about transfers
 Communication Protocols
y1
u1 ' y2
2
uu11' 1 u1
1 y3
y4
2
y5

Communication cost = 3 bits (worst-case)

• Binary extensive-form message game (tree)

• Agents’ (type-contingent) strategies
• Outcomes assigned to leaves
 Incentivizing a Protocol
y1 , t11, t21
2 y 2 , t 1 2 , t2 2
1
1 y3 , t13, t23
y4 , t14, t24
2
y5 , t15, t25
• Assign incentivizing payments to the leaves
• Hide history (create Information Sets) to
prevent contingent deviations
• A given protocol may not be incentivizable –
may need more communication
 Sources of CCS
• EPIC: No need to hide info; CCS comes
from the need to compute payments
• BIC: CCS comes from need to hide info;
(computing payments does not require extra
bits)
• Restrict to f that is implementable in some
IC mechanism (e.g. full revelation)
– for others, CCS = 1
 A Protocol that can’t be EPIC
incentivized
• Allocate one object between two agents
efficiently; values v1 2 {1,2,3,4}, v2 2 [0,5].
• Protocol:
– Agent 1 announces v1 (2 bits)
– Agent 2 “takes” iff v2 ¸ v1 (1 bit)
• Intuition: for EPIC, agent 1 must be charged a price
within 1 of v2, but it is not revealed
• Can show that any EPIC protocol must take ¸ 3 bits;
 EPIC CCS = 1
• A similar example for BIC
 An Upper Bound on CCS
(both BIC and EPIC)
y1
y2
2
1
1 y3
y4
2
y5
• Take a protocol P computing f (which is implementable)
• Can incentivize agents if observe their strategies in P
– Transfers need only depend on the strategies
– Punish strategies that are not consistent with any type
• Protocol in which all agents simultaneously announce their
strategies in P is incentivizable
 An Upper Bound on CCS
(both BIC and EPIC)
y1
y2
2
1
1 y3
y4
2
y5

• A d-bit protocol P has · 2d decision nodes 

agents’ strategies can be described with · 2d bits
 Comm. Complexity with IC · 2Comm. Complexity
• Is the bound tight? For EPIC, open question
 Example: Low CCS for Efficiency
• f(u) solves maxy i ui(y)
• Let agents announce final utilities wi = ui(y), pay
each agent ti = jiwj
  Agents become a “team”
  Efficient protocol is EPIC
  Even if can’t reach full efficiency, strategies
maximizing expected surplus form a BNE

• Also, any EPIC implementable f (e.g., efficiency)

has BIC CCS = 0
 Exponential Bound reached for BIC
Expert 3 1 4 5 2
Decisions

Consequences
Boss
• Expert privately knows 1-to-1 mapping
between K decisions and K consequences
– Also has a private utility over decisions
• Boss privately knows desired consequence
 Bound is reached for BIC
Expert 3 1 4 5 2
Decisions

Consequences
Boss
• A simple protocol:
– Boss announces desired consequence (logK bits),
– Expert decides (logK bits)
• Not BIC – Expert will maximize own utility
 Bound is reached for BIC
Expert 3 1 4 5 2
Decisions

Consequences
Boss
• A BIC protocol:
– Expert reveals mapping
( log(K!)~KlogK bits – exponentially longer)
– Boss decides
• We show that any BIC protocol takes ¸ K/2 bits -
exponentially longer than the simple protocol
 Extensions: CCS is unbounded for
• Average-case communication complexity
– Example: allocate object efficiently between 2 agents
with values uniformly drawn from [0,1]
• Bisection takes on expectation 4 bits (Arrow et al.)
• EPIC for Agent 1 requires essentially charging him agent 2’s
value, which has unbounded entropy
• BIC CCS with Correlated Types
– Example: Agent 1 has “large” type that determines
binary outcome and correlates with Agent 2’s type
• BIC must punish Agent 1 when “caught lying” by Agent 2
• EPIC CCS with Interdependent Valuations:
vi(x,si,s-i), where si is agent i’s type
– Example: Agent 1 knows whether he should get the
object but his value for it is known only to Agent 2
• EPIC requires charging Agent 1 this value
 Open Questions
• EPIC CCS – how high can it be?
• In what practical problems is CCS low?
• Can CCS be reduced substantially if ICs
only need to be satisfied approximately
(equivalently, utilities given with finite
precision)?
 Ideas for understanding firms
• Coase (1937), Simon (1951): firms are
islands of authority where “discovering
what the relevant prices are” is too costly
– Have example where authority achieves
efficiency with probability  1, but verifying it
(finding prices) takes exponentially more bits
• Communication may be distributed to
economize on individual costs
– Individual costs may be reduced by hiring extra
agents (“managers”) to relay prices (cf.
computational models of Radner - van Zandt)