THE DEMAND REVEALING PROCESS - TO DISTRIBUTE THE SURPLUS

Contrary to the established, frequently repeated proposition that its budget surplus cannot be distributed to taxpayers without disturbing t he incentive compatibility of the demand-revealing process (DRP), the surplus can be distributed by reapplying the key concept of the DRP. T here will remain an aggregate refund error that in a Bayesian sense is random with zero mean, and which vanishes O(1/N)(2) as the economy be comes large through replication. To deal with income effects, when one does not restrict the domain of the mechanism to separable utility fu nctions, I suggest a variation of the DRP that preserves its incentive compatibility when N is finite.