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What money canʼt buy: Efficient mechanism design with costly signals

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  • Condorelli, Daniele

Abstract

I 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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  • Condorelli, Daniele, 2012. "What money canʼt buy: Efficient mechanism design with costly signals," Games and Economic Behavior, Elsevier, vol. 75(2), pages 613-624.
  • Handle: RePEc:eee:gamebe:v:75:y:2012:i:2:p:613-624
    DOI: 10.1016/j.geb.2012.02.018
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Elchanan Ben-Porath & Eddie Dekel & Barton L. Lipman, 2014. "Optimal Allocation with Costly Verification," American Economic Review, American Economic Association, vol. 104(12), pages 3779-3813, December.
    2. repec:eee:jetheo:v:171:y:2017:i:c:p:101-135 is not listed on IDEAS
    3. Condorelli, Daniele, 2013. "Market and non-market mechanisms for the optimal allocation of scarce resources," Games and Economic Behavior, Elsevier, vol. 82(C), pages 582-591.
    4. repec:eee:gamebe:v:104:y:2017:i:c:p:468-485 is not listed on IDEAS
    5. Tymofiy Mylovanov & Andriy Zapechelnyuk, 2017. "Optimal Allocation with Ex Post Verification and Limited Penalties," American Economic Review, American Economic Association, vol. 107(9), pages 2666-2694, September.
    6. Goldlücke, Susanne & Tröger, Thomas, 2018. "Assigning an unpleasant task without payment," Working Papers 18-02, University of Mannheim, Department of Economics.
    7. Chen Ling & David Scrogin, 2014. "Optimal pricing of public lotteries and comparison of competing mechanisms," Applied Economics, Taylor & Francis Journals, vol. 46(26), pages 3211-3223, September.
    8. repec:oup:restud:v:84:y:2017:i:2:p:688-717. is not listed on IDEAS
    9. Todd R. Kaplan & Shmuel Zamir, 2014. "Advances in Auctions," Discussion Papers 1405, Exeter University, Department of Economics.
    10. Alex Gershkov & Benny Moldovanu & Xianwen Shi, 2017. "Optimal Voting Rules," Review of Economic Studies, Oxford University Press, vol. 84(2), pages 688-717.
    11. Holzer Jorge & McConnell Kenneth, 2016. "A Model of Access in the Absence of Markets," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 16(1), pages 367-388, January.
    12. Chakravarty, Surajeet & Kaplan, Todd R., 2013. "Optimal allocation without transfer payments," Games and Economic Behavior, Elsevier, vol. 77(1), pages 1-20.
    13. Helmuts Āzacis & Péter Vida, 2015. "Collusive communication schemes in a first-price auction," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 58(1), pages 125-160, January.
    14. Kwiek, Maksymilian, 2017. "Efficient voting with penalties," Games and Economic Behavior, Elsevier, vol. 104(C), pages 468-485.
    15. Drexl, Moritz & Kleiner, Andreas, 2015. "Optimal private good allocation: The case for a balanced budget," Games and Economic Behavior, Elsevier, vol. 94(C), pages 169-181.
    16. Alex Gershkov & Benny Moldovanu & Xianwen Shi, 2013. "Optimal Mechanism Design without Money," Working Papers tecipa-481, University of Toronto, Department of Economics.
    17. Kaplan, Todd R. & Zamir, Shmuel, 2015. "Advances in Auctions," Handbook of Game Theory with Economic Applications, Elsevier.
    18. Kleiner, Andreas & Drexl, Moritz, 2013. "Why Voting? A Welfare Analysis," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79886, Verein für Socialpolitik / German Economic Association.

    More about this item

    Keywords

    Mechanism design; Costly signals; Priority lists; Lotteries;

    JEL classification:

    • D45 - Microeconomics - - Market Structure, Pricing, and Design - - - 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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