What money canʼt buy: Efficient mechanism design with costly signals
AbstractI study the ex-ante efficient allocation of a set of quality-heterogeneous objects to a number of heterogeneous risk-neutral agents. Agents have independent private values, which represent the maximum cost they are willing to sustain to obtain an object of unitary quality. The designer faces a trade-off between allocative efficiency and cost of screening, because the cost sustained is wasted. The optimal mechanism ranks agents based on their marginal contribution to social surplus and distributes objects to higher-ranked agents. The ranking is independent of the scarcity of objects or the extent of their heterogeneity. If the hazard rates of the distributions of values are increasing, agents are ranked according to their expected values. If hazard rates are decreasing and agents are symmetric, the objects are allocated to the agents that sustain the highest costs. In general, optimal mechanisms combine both pooling and screening of values.
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Bibliographic InfoArticle provided by Elsevier in its journal Games and Economic Behavior.
Volume (Year): 75 (2012)
Issue (Month): 2 ()
Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/622836
Mechanism design; Costly signals; Priority lists; Lotteries;
Find related papers by JEL classification:
- D45 - Microeconomics - - Market Structure and Pricing - - - Rationing; Licensing
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods
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