Redistributive Allocation Mechanisms
53 Pages Posted: 18 Jun 2020 Last revised: 23 Jun 2023
Date Written: June 22, 2023
Abstract
Many scarce public resources are allocated at below-market-clearing prices, and sometimes for free. Such "non-market" mechanisms sacrifice some surplus, yet they can potentially improve equity. We develop a model of mechanism design with redistributive concerns. Agents are characterized by a privately observed willingness to pay for quality, a publicly observed label, and a social welfare weight. A market designer controls allocation and pricing of a set of objects of heterogeneous quality, and maximizes the expectation of a welfare function. The designer does not directly observe individuals' social welfare weights. We derive structural insights about the form of the optimal mechanism, leading to a framework for determining how and when to use non-market mechanisms. The key determinant is the strength of the statistical correlation of the unobserved social welfare weights with the label and willingness to pay.
Keywords: optimal mechanism design, redistribution, inequality, welfare
JEL Classification: C78, D47, D61, D63, D82
Suggested Citation: Suggested Citation