Natural implementation with partially-honest agents in economic environments with free-disposal

We study Nash implementation by natural price-quantity mechanisms in pure exchange economies with free-disposal (Saijo et al., 1996, 1999) where agents have weak/strong intrinsic preferences for honesty (Dutta and Sen, 2012). Firstly, the Walrasian rule is shown to be non-implementable where all agents have weak (but not strong) intrinsic preferences for honesty. Secondly, the class of effi cient allocation rules that are implementable is identified provided that at least one agent has strong intrinsic preferences for honesty. Lastly, the Walrasian rule is shown to belong to that class. JEL classification: C72; D71. Key-words: Natural implementation, Nash equilibrium, exchange economies, intrinsic preferences for honesty. ∗We are grateful to Bram Driesen, Hitoshi Matsushima, Hervé Moulin, Hans Peters, Tatsuyoshi Saijo, Arunava Sen, DavidWettstein, Nicholas C. Yannelis, for useful comments and suggestions. Special thanks go to exceptionally thorough referees and an advisory editor, whose comments and suggestions have led to substantial improvements in the paper. The usual caveat applies. †Adam Smith Business School, University of Glasgow, Glasgow, G12 8QQ, United Kingdom, e-mail: [email protected]. ‡Institute of Economic Research, Hitotsubashi University, 2-4 Naka, Kunitachi, Tokyo, 186-8603 Japan, e-mail: [email protected].