What is “Incentive Compatibility”?

Abstract

In spite of its overwhelming success in theory and practice the shortcomings of the neo-classical approach in finance are well-known. It cannot explain many important phenomena, so that serious doubts on the generated positive results arise. Consequently interest shifts towards the neo-institutional framework, but it is quite difficult to judge the relevance of its results, since they are very sensitive to assumptions and details of the models. For instance, solution mechanisms for (financial) problems should be "incentive compatible". This describes an idea and not an exact definition. There exists a variety of operationalizations, and due to the mentioned lack of robustness some sort of classification of models turns out to be an important task for future research.