Well-behaved infinite signaling games may have no sequential equilibria. The author proves that adding cheap talk to these games 'solves' the nonexistence problem: the limit of sequential equilibrium outcomes of finite approximating games is a sequential equilibrium outcome of the cheap-talk extension of the limit game. In addition, when the signaling space has no isolated points, any cheap-talk sequential equilibrium outcome can be approximated by a sequential [epsilon]-equilibrium of the game without cheap talk. Copyright 1996 by The Econometric Society.

MONOTONICITY OF PREFERENCES is a common assumption in the theory of the core of an economy. It implies that any increase in consumption will be welcomed by a consumer, independent of the reference consumption bundle. Although it seems to be an innocuous assumption, there are several important instances in which monotonicity is not satisfied. The simplest one embraces commodities or services that some economic agents dislike. A second failure of monotonicity is given by satiation points. Many goods may increase the consumer's welfare up to a point, but become a burden if consumed in excess. Goods that must be consumed in fixed proportions constitute yet another exception to the monotonicity assumption. Coffee and cream, and cars and tires are typical examples. In this paper we shall study the relationship between core allocations and the set of competitive equilibria when preferences are not monotonic.

We prove—in the standard independent private-values model—that the outcome, in terms of interim expected probabilities of trade and interim expected transfers, of any Bayesian mechanism can also be obtained with a dominant-strategy mechanism.

We analyze optimal mechanisms in environments where sellers are privately informed about quality. A methodology is provided for deriving conditions that are necessary and sufficient to determine when two simple trading environments maximize either social or private surplus. The commonly used auction mechanism is frequently inefficient in procurement environments. Often, the optimal mechanism is simply to order potential suppliers and to tender take-it-or-leave-it offers to each sequentially. We completely characterize the environments in which either mechanism is optimal. In doing so, we develop a general methodology that determines when and if a given trading institution is optimal.