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An incentive efficient market for mechanisms in large Akerlof economies

Author

Listed:
  • Alex Citanna

    (New York University)

  • Paolo Siconolfi

    (Columbia Business School)

Abstract

We study ‘Akerlof economies’, that is, economies where goods come in qualities unknown to buyers, and sellers’ quality can be ranked. Cross-subsidies at the constrained efficient allocation arise, even when there are few high-quality types in the economy. Thus, Akerlof’s markets are poorly suited to deliver constrained efficient outcomes. We then design a competitive market for mechanisms. Agents buy lottery tickets to enter mechanisms, and the price system clears the markets. Firms offer tickets to mechanisms on the basis of ‘input’ prices which, unlike in Akerlof’s competitive markets, are quality dependent. Under standard sorting conditions, we show that a ‘no-price-cut’ competitive equilibrium exists and is incentive efficient.

Suggested Citation

  • Alex Citanna & Paolo Siconolfi, 2022. "An incentive efficient market for mechanisms in large Akerlof economies," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 73(1), pages 1-54, February.
    • Handle: RePEc:spr:joecth:v:73:y:2022:i:1:d:10.1007_s00199-020-01329-2
    DOI: 10.1007/s00199-020-01329-2
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    More about this item

    Keywords

    Adverse selection; Competition; Efficiency; Decentralization;
    All these keywords.

    JEL classification:

    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D60 - Microeconomics - - Welfare Economics - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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