Question

True or False & Explain:

In exchange with price-setting power, when a player’s incentive compatibility constraint is satisfied, then the player’s participation constraint is automatically satisfied, and when a player’s participation constraint is satisfied, then the player’s incentive compatibility constraint is automatically satisfied.

Answer 1

In exchange with price-setting power, when a player’s incentive compatibility constraint is satisfied, then the player’s participation constraint is automatically satisfied, and when a player’s participation constraint is satisfied, then the player’s incentive compatibility constraint is automatically satisfied. True

The participation constraint means that people who want to participate will earn something than by not participating. The incentive compatibility constraint means people are motivated to work more. The incentive compatibility ensures that the compensation they receive from the acievement of a target is more than their usual compensation. For exa, suppose in a manufacturing unit the owner needs employees to work. The participation constraint makes sure that some people would rather be employed than engage in something else. The incentive compatibility constraint makes sure that the employees are motivated to act according to owner's instruction. So when a player's incentive compatibility constraint is satisfied then the player's participation constraint is automatically satisfied. In this case incentive will motivate players to play well & the participation constraint means that player will participate to make them better off than by non-participation. In both the case they will participate,whether it may be incentive constraint or participation constraint. Similarly, the opposite one is also true,i.e, when a player's participation constraint is satisfied then the player's incentive compatibility constraint is automatically satisfied.