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Market and Non-Market Mechanisms for the Optimal Allocation of Scarce Resources

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  • Daniele Condorelli

Abstract

Both market (e.g. auctions) and non-market mechanisms (e.g. lotteries and priority lists) are used to allocate a large amount of scarce public resources that produce large private benefits and small consumption externalities. I study a model in which the use of both market and non-market mechanisms can be rationalized. Agents are risk neutral and heterogeneous in terms of their monetary value for a good and their opportunity cost of money, which are both private information. The designer wants to allocate a set of identical goods to the agents with the highest values. To achieve her goal, she can screen agents on the basis of their observable characteristics, and on the basis of information on their willingness to pay that she can extract using market mechanisms. In contrast to models where willingness to pay and value coincide, a first best cannot be achieved. My main result is that both market and non-market mechanisms, or hybrid mechanisms, can be optimal depending on the prior information available to the designer. In particular, non-market mechanisms may be optimal if the value is positively correlated with the opportunity cost of money.

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Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1483.

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Date of creation: Nov 2009
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Handle: RePEc:nwu:cmsems:1483

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  1. John G. Riley & William Samuelson, 1979. "Optimal Auctions," UCLA Economics Working Papers 152, UCLA Department of Economics.
  2. Jehiel, Phillipe & Moldovanu, Benny, 1999. "Efficient Design with Interdependent Valuations," Sonderforschungsbereich 504 Publications 99-74, Sonderforschungsbereich 504, Universit├Ąt Mannheim & Sonderforschungsbereich 504, University of Mannheim.
  3. Zheng, Charles Z., 2001. "High Bids and Broke Winners," Journal of Economic Theory, Elsevier, vol. 100(1), pages 129-171, September.
  4. Armstrong, Mark, 1996. "Multiproduct Nonlinear Pricing," Econometrica, Econometric Society, vol. 64(1), pages 51-75, January.
  5. Evans, Mary F. & Vossler, Christian A. & Flores, Nicholas E., 2009. "Hybrid allocation mechanisms for publicly provided goods," Journal of Public Economics, Elsevier, vol. 93(1-2), pages 311-325, February.
  6. McAfee, R. Preston & McMillan, John, 1988. "Multidimensional incentive compatibility and mechanism design," Journal of Economic Theory, Elsevier, vol. 46(2), pages 335-354, December.
  7. Daniele Condorelli, 2009. "What money can't buy: allocations with priority lists, lotteries and queues," Discussion Papers 1482, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. Che, Yeon-Koo & Gale, Ian, 1998. "Standard Auctions with Financially Constrained Bidders," Review of Economic Studies, Wiley Blackwell, vol. 65(1), pages 1-21, January.
  9. Paul Klemperer, 2004. "Auctions: Theory and Practice," Online economics textbooks, SUNY-Oswego, Department of Economics, number auction1, March Cit.
  10. Charles Zhoucheng Zheng, 2002. "Optimal Auction with Resale," Econometrica, Econometric Society, vol. 70(6), pages 2197-2224, November.
  11. Alvin E. Roth, 2006. "Repugnance as a Constraint on Markets," Levine's Bibliography 321307000000000629, UCLA Department of Economics.
  12. William Vickrey, 1961. "Counterspeculation, Auctions, And Competitive Sealed Tenders," Journal of Finance, American Finance Association, vol. 16(1), pages 8-37, 03.
  13. Roger B. Myerson, 1988. "Mechanism Design," Discussion Papers 796, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  14. Roth,Alvin E. & Sotomayor,Marilda A. Oliveira, 1992. "Two-Sided Matching," Cambridge Books, Cambridge University Press, number 9780521437882, December.
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