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In mechanism design, a process is incentive-compatible if all of the participants fare best when they truthfully reveal any private information asked for by the mechanism. As an illustration, voting systems which create incentives to vote dishonestly lack the property of incentive compatibility. In the absence of dummy bidders or collusion, a second price auction is an example of a mechanism that is incentive compatible.
There are different degrees of incentive-compatibility: in some games, truth-telling can be a dominant strategy. A weaker notion is that truth-telling is a Bayes-Nash equilibrium: it is best for each participant to tell the truth, provided that others are also doing so.
The term has also been used in economics research.
- Chen, Yan – "Incentive-Compatible Mechanisms for Pure Public Goods: A Survey of Experimental Research" 2003, JEL Classification Codes: C9, C72, H41
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