Incomplete information, incentive compatibility, and the core

We consider an exchange economy in which agents possess private information at the time of engaging in state contingent contracts. While communication of private information is permitted, the true information state is not ver ifiable. The enforcement of contracts is, therefore, limited by incentive c ompatibility constraints. We formalize a notion of the core for such an eco nomy. Our analysis can be viewed as an attempt to incorporate incentive com patibility in the coarse core of R. Wilson (1978, Econometrica 46, 807-816) , or as an attempt to introduce coalitional contracts in the notion of ince ntive efficiency of B. Holmstrom and R. Myerson (1983, Econometrica 51, 179 9-1819). While there are some special cases in which the incentive compatib le core is non-empty, our main result shows that is not generally true. (C) 1999 Academic Press.