<p>More or less yes. <em>Incentive compatibility</em>, in economics, is defined as a situation where every agent can achieve the highest utility (or best outcome using different metric) by acting according to their true preferences/agent type instead of acting in a way that hides their true preferences or agent type.</p>
<p>For example, an incentive compatibility tax scheme would be scheme were taxes are such that high productivity people pretend that they are low productivity. For example, smarter person can always play dumb and if playing dumb is sufficiently rewarded they would have incentive to do so. If such deceit would not be sufficiently rewarded we would say the tax satisfies the incentive compatibility constrain. You can interpret this either as imitating another agent or as hiding true private preferences/information.</p>

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2023-04-10T11:18:24.477Z
2023-04-10T11:18:24.477Z
1muflon1
<p>In my finance class, the professor seems to treat &quot;incentive compatibility&quot; to be equivalent to &quot;none of the agents in the model have reason to <em>imitate</em> each other&quot;.</p>
<p>Is this a common interpretation? Why can we think of these as equivalent?</p>

<incentives>
How can incentive compatibility be interpreted in terms of agents not wanting to imitate each other?
1989-a-number
# How can incentive compatibility be interpreted in terms of agents not wanting to imitate each other?

(Asked by: username_0 on 2023-04-10)

In my finance class, the professor seems to treat "incentive compatibility" to be equivalent to "none of the agents in the model have reason to *imitate* each other".

Is this a common interpretation? Why can we think of these as equivalent?

**Tags:** incentives


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## 1 answers

### Answer by username_1 on 2023-04-10. Score: 2 | Accepted answer

More or less yes. *Incentive compatibility*, in economics, is defined as a situation where every agent can achieve the highest utility (or best outcome using different metric) by acting according to their true preferences/agent type instead of acting in a way that hides their true preferences or agent type.

For example, an incentive compatibility tax scheme would be scheme were taxes are such that high productivity people pretend that they are low productivity. For example, smarter person can always play dumb and if playing dumb is sufficiently rewarded they would have incentive to do so. If such deceit would not be sufficiently rewarded we would say the tax satisfies the incentive compatibility constrain. You can interpret this either as imitating another agent or as hiding true private preferences/information.


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