Question

3) What is the underlying logic/insight as to why the Grove Clark mechanism works?

I want to know this answer

Answer 1

Grove Clarke Mechanisms helps us in achieving the socially optimum outcome by selecting any possible outcome from the given data set by dividing given available resources among the people equally. This mechanism implements a utilitarian social function which maximizes the sum of values and it helps in finding the socially outcome through the agents reports. The step of calculating agent reports is : lets say there are n agents which have different monetary valuations for different results. Adding up the valuation of every agent gives us the agent report which also gives us the total welfare of society because the value calculated by all agents cover each and every resources in the society. Giving the reliable results and giving the true valuation of results is called the dominant strategy. This mechanisms also helps us in minimization of cost as we have true valuation of resources which can help us in reducing the production cost.

Lets apply there theories to the actual market through which you can get to know that why this works. If the government wants to build a school for poor students. If these utility function (value given by the students for the project) of students have more value than the cost of the school, then the school will be build or it can be seen other way round when the taxes paid by the people is less than the valuation they will show their interest in building the school otherwise not.