The New Palgrave Dictionary of Economics Online

Incentive compatibility – a characteristic of mechanisms whereby each agent knows that his best strategy is to follow the rules, no matter what the other agents will do – is desirable because it promotes the achievement of group goals. But it is elusive because pervasive opportunities exist for misbehaviour, such as by misrepresenting preferences. This article reviews attempts to solve or at least to manage the incentive compatibility problem. Incentive compatibility provides a basic constraint on the possibilities for normative analysis, and so serves as the fundamental interface between what is desirable and what is possible in a theory of organizations.