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How to allocate Research (and other) Subsidies


  • Ludwig Ensthaler
  • Thomas Giebe


A budget-constrained buyer wants to purchase items from a shortlisted set. Items are differentiated by observable quality and sellers have private reserve prices for their items. The buyer’s problem is to select a subset of maximal quality. Money does not enter the buyer’s objective function, but only his constraints. Sellers quote prices strategically, inducing a knapsack game. We derive the Bayesian optimal mechanism for the buyer’s problem. We find that simultaneous takeit-or-leave-it offers are optimal. Hence, somewhat surprisingly, ex-post competition is not required to implement optimality. Finally, we discuss the problem in a detail free setting.

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  • Ludwig Ensthaler & Thomas Giebe, 2010. "How to allocate Research (and other) Subsidies," Discussion Papers 1517, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  • Handle: RePEc:nwu:cmsems:1517

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    References listed on IDEAS

    1. Tilman Börgers & Peter Norman, 2009. "A note on budget balance under interim participation constraints: the case of independent types," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 39(3), pages 477-489, June.
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    Mechanism Design; Subsidies; Budget; Procurement; Knapsack Problem JEL Classification Numbers: D21; D44; D45; D82;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D45 - Microeconomics - - Market Structure, Pricing, and Design - - - Rationing; Licensing
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design


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