STRATEGY-PROOF EXCHANGE

We consider the allocation of goods in exchange economies with a finit e number of agents who may have private information about their prefer ences. In such a setting, standard allocation rules such as Walrasian equilibria or rational expectations equilibria are not compatible with individual incentives. We characterize the set of allocation rules wh ich are incentive compatible, or in other words, the set of strategy-p roof social choice functions. Social choice functions which are strate gy-proof are those which can be obtained from trading according to a f inite number of pre-specified proportions. The number of proportions w hich can be accommodated is proportional to the number of agents. Such rules are necessarily inefficient, even in the limit as the economy g rows.