[zwaps]

Normally, incentive compatibility is a concept from game theory and, more significantly, mechanism design (most known for auction theory).

In simple terms, it states that the mechanism that (say) Google offers to the consumer is such that the consumer finds it optimal to act according to their true preferences. In so called direct mechanisms, this means that the consumer would prefer to reveal their true type (information about themselves), rather than trying to fake being someone else. If this is true, it is much simpler to build mechanisms that are robust and achieve good outcomes.

For example, Hotel booking websites are typically not incentive compatible if they offer different prices to different users. Some user who is known to accept high prices will be offered higher prices in the future. However, if this tracking is imperfect, the price mechanism is not incentive compatible. The consumer would prefer to pretend to have a lower willingness to pay, and would thus be offered the same hotel for a lower price.

On the other hand, bundled goods (like cars accessory packages) may be incentive compatible, because even though each package is somewhat imperfect for each customer, they still prefer the "their" package over another one that is less costly. That way, the car company can maximize profits.

In mechanism design (for example, in the design of auctions), incentive compatibility is usually a requirement to derive mechanisms to that maximize the objective function. This is so, because there are of course infinitely many complex mechanisms one could propose. But, under some conditions, incentive compatibility ensures that the "optimal" mechanism will have a simple structure.

Finally, there are substantive reasons: If a customer has to act against their true preferences, the system is likely unstable and gameable. And also, people might walk away.

Some people also consider the participation constraint a part of incentive compatibility. That is, the consumer must at least gain as much as not participating at all.

In the present case, the participation constraint is violated. The consumer gains nothing by being targeted and, if asked, would rather opt out. In that case, Google can design whatever they want, an informed customer will reject it.

Google and Ad firms know this, which is why it is virtually impossible to truly opt out. The participation constraint is knocked away by deceptive practices and dark patterns.

[choppaface]

Right! This is the notion of incentive compatibility I'm trying to draw upon. One problem here is that not all of the incentives and objective functions are visible. That said, Google I'm certain has approved FLoC for launch based upon a mechanism, and so far I really see no evidence that that mechanism can actually be favorable to the wider public (not just "privacy geeks"). Would love to see Google's actual research that was provided to the launch committee, but I might as well ask for access to Area 51.

For the majority of users, I do believe tracking has some upshot, at least for reducing ad spam and ad fraud. It's really hard to prove this without a counterfactual study, but if you compare Facebook ads with the crap on news sites today, I think that situation is illustrative of a place where Facebook's improved targeting saves the user from a lot of spam / fraud. And I'd argue that outcome is a result of Facebook having a monopoly over their own targeting and identifiers.