SEQUENTIAL RATIONALITY, IMPLEMENTATION AND PRE-PLAY COMMUNICATION

The following questions are addressed: what are the bounds on a mechan ism designer's ability to implement social objectives when the agents indulge in (possibly mediated) communication prior to participation in the mechanism? Moreover, how do these bounds compare with those obtai ned in the absence of communication opportunities? The paper (i) shows that a sequential structure is essential to the study of communicatio n and identifies an appropriate equilibrium concept - sequential media ted equilibrium; (ii) defines the problem of implementation of social performance standards in environments with communication and provides necessary and sufficient conditions for implementability; and (iii) ex amines the normative implications of these conditions. It is shown tha t, in general, no interim individually rational and Pareto-efficient p erformance standard is implementable. However, when there is complete information among economic agents, pre-play communication does not pos e any additional constraints on the designer; any standard that is imp lementable in the absence of communication remains implementable even in the presence of communication opportunities.