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Non-Market Allocation Mechanisms: Optimal Design and Investment Incentives

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  • Victor Augias
  • Eduardo Perez-Richet

Abstract

We study how to optimally design selection mechanisms, accounting for agents' investment incentives. A principal wishes to allocate a resource of homogeneous quality to a heterogeneous population of agents. The principal commits to a possibly random selection rule that depends on a one-dimensional characteristic of the agents she intrinsically values. Agents have a strict preference for being selected by the principal and may undertake a costly investment to improve their characteristic before it is revealed to the principal. We show that even if random selection rules foster agents' investments, especially at the top of the characteristic distribution, deterministic "pass-fail" selection rules are in fact optimal.

Suggested Citation

  • Victor Augias & Eduardo Perez-Richet, 2023. "Non-Market Allocation Mechanisms: Optimal Design and Investment Incentives," Papers 2303.11805, arXiv.org.
    • Handle: RePEc:arx:papers:2303.11805
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    File URL: http://arxiv.org/pdf/2303.11805
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