VCG mechanism
A mechanism that picks the outcome maximising total reported value and charges each participant the loss their presence imposes on everyone else.
Often misread asExpecting the payments to balance, so the mechanism is assumed to fund itself when in general it collects too little and sometimes needs an outside subsidy.
How to see it
You pay for the harm your presence does to everyone else
Pick whatever outcome maximises the total of the reported values, then charge each person the damage they do to the others: what the others would have had without them, less what the others get with them. Because your bill depends on whether you are present rather than on what you said, you have no reason to misreport.
The checkTruthfulness and efficiency are bought at the cost of a balanced budget. In general you cannot have all three at once, which is what the Myerson impossibility result makes precise.
Try itRun it on one item with two bidders and check you have rederived the second price auction, with the winner paying the loser's bid. Then run it on a shared road that several households want built, and check whether the payments collected cover the cost of building it.
Know these first
Leads on to
Easily confused with
Sources
- Vickrey, W. (1961). Journal of Finance 16(1), 8-37.
- Clarke, E. H. (1971). Public Choice 11, 17-33.
- Groves, T. (1973). Econometrica 41(4), 617-631.
- Mas-Colell, A., Whinston, M. & Green, J. (1995). Oxford University Press.
- Krishna, V. (2002). Academic Press.