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In game theory and economics, a mechanism is called incentive-compatible (IC)[1]: 415 if every participant can achieve their own best outcome by reporting their true preferences.[1]: 225 [2] For example, there is incentive compatibility if high-risk clients are better off in identifying themselves as high-risk to insurance firms, who only sell discounted insurance to high-risk clients. Likewise, they would be worse off if they pretend to be low-risk. Low-risk clients who pretend to be high-risk would also be worse off.[3] The concept is attributed to the Russian-born American economist Leonid Hurwicz.[2]
- ^ a b Vazirani, Vijay V.; Nisan, Noam; Roughgarden, Tim; Tardos, Éva (2007). Algorithmic Game Theory (PDF). Cambridge, UK: Cambridge University Press. ISBN 0-521-87282-0.
- ^ a b "Incentive compatibility | game theory". Encyclopedia Britannica. Retrieved 2020-05-25.
- ^ James Jr, Harvey S. (2014). "Incentive compatibility". Britannica.