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Auction Design with Fairness Concerns: Subsidies vs. Set-Asides

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  • Mallesh Pai
  • Rakesh Vohra

Abstract

Government procurement and allocation programs often use subsidies and set-asides favoring small businesses and other target groups to address fairness concerns. These concerns are in addition to standard objectives such as efficiency and revenue. We study the design of the optimal mechanism for a seller concerned with efficiency, subject to a constraint to favor a target group. In our model, buyers' private values are determined by costly pre-auction investment. If the constraint is distributional, i.e. to guarantee that the target group wins `sufficiently often', then the constrained efficient mechanism is a flat subsidy. This is consistent with findings in the empirical literature. In contrast, if the constraint is to ensure a certain investment level by the target group, the optimal mechanism is a type dependent subsidy. In this case a set aside may be better than a flat or percentage subsidy.

Suggested Citation

  • Mallesh Pai & Rakesh Vohra, 2012. "Auction Design with Fairness Concerns: Subsidies vs. Set-Asides," Discussion Papers 1548, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    • Handle: RePEc:nwu:cmsems:1548
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    Cited by:

    1. Dries R. Goossens & Sander Onderstal & Jan Pijnacker & Frits C. R. Spieksma, 2014. "Solids: A Combinatorial Auction for Real Estate," Interfaces, INFORMS, vol. 44(4), pages 351-363, August.
    2. Manzano, Carolina & Vives, Xavier, 2021. "Market power and welfare in asymmetric divisible good auctions," Theoretical Economics, Econometric Society, vol. 16(3), July.
    3. Hitoshi Matsushima, 2021. "Auctions with Ethical Concerns," CARF F-Series CARF-F-515, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    4. Rahul Deb & Mallesh Pai, 2013. "Symmetric Auctions," Working Papers tecipa-486, University of Toronto, Department of Economics.
    5. Erya Yang, 2021. "Reduced-form mechanism design and ex post fairness constraints," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 9(2), pages 269-293, October.

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