The revelation principle of economics can be stated as, "To any Bayesian Nash equilibrium of a game of incomplete information, there corresponds an associated revelation mechanism that has an equilibrium where the players truthfully report their types."^{[citation needed]}

For dominant strategies, instead of Bayesian equilibrium, the revelation principle was introduced by Gibbard (1973). Later this principle was extended to the broader solution concept of Bayesian equilibrium by Dasgupta, Hammond and Maskin (1979), Holmstrom (1977), and Myerson (1979).

The revelation principle is useful in game theory, Mechanism design, social welfare and auctions. William Vickrey, winner of the 1996 Nobel Prize for Economics, devised an auction type where the highest bidder would win the sealed bid auction, but at the price offered by the second-highest bidder. Under this system, the highest bidder would be better motivated to reveal his maximum price than in traditional auctions, which would also benefit the seller. This is sometimes called a second price auction or a Vickrey auction.

In Mechanism design the revelation principle is of utmost importance in finding solutions. The researcher need only look at the set of equilibrium characterized by incentive compatibility. By narrowing the area needed to be searched, the problem of finding a mechanism becomes much easier.

[edit] See also

• Mechanism design
• Incentive compatibility
• The Market for Lemons
• Nash equilibrium
• Game theory
• Constrained Pareto efficiency

[edit] References

• Dasgupta, P., Hammond, P. and Maskin, E. 1979. The implementation of social choice rules: some results on incentive compatibility. Review of Economic Studies 46, 185–216.
• Gibbard, A. 1973. Manipulation of voting schemes: a general result. Econometrica 41, 587–601.
• Holmstrom, B. 1977. On incentives and control in organizations. Ph.D. thesis, Stanford University.
• Myerson, R. 1979. Incentive-compatibility and the bargaining problem. Econometrica 47, 61–73.

This economics or finance-related article is a stub. You can help Wikipedia by expanding it. v • d • e