Redistribution through Markets

75 Pages Posted: 20 Mar 2018 Last revised: 24 Dec 2019

See all articles by Piotr Dworczak

Piotr Dworczak

Northwestern University - Department of Economics

Scott Duke Kominers

Harvard University

Mohammad Akbarpour

Stanford University

Date Written: December 24, 2019

Abstract

Policymakers frequently use price regulations as a response to inequality in the markets they control. In this paper, we examine the optimal structure of such policies from the perspective of mechanism design. We study a buyer-seller market in which agents have private information about both their valuations for an indivisible object and their marginal utilities for money. The planner seeks a mechanism that maximizes agents' total utilities, subject to incentive and market-clearing constraints. We uncover the constrained Pareto frontier by identifying the optimal trade-off between allocative efficiency and redistribution. We find that competitive-equilibrium allocation is not always optimal. Instead, when there is substantial inequality across sides of the market, the optimal design uses a tax-like mechanism, introducing a wedge between the buyer and seller prices, and redistributing the resulting surplus to the poorer side of the market via lump-sum payments. When there is significant within-side inequality, meanwhile, it may be optimal to impose price controls even though doing so induces rationing.

Keywords: optimal mechanism design, redistribution, inequality, welfare theorems

JEL Classification: D47, D61, D63, D82, H21

Suggested Citation

Dworczak, Piotr and Kominers, Scott Duke and Akbarpour, Mohammad, Redistribution through Markets (December 24, 2019). Becker Friedman Institute for Research in Economics Working Paper No. 2018-16. Available at SSRN: https://ssrn.com/abstract=3143887 or http://dx.doi.org/10.2139/ssrn.3143887

Piotr Dworczak

Northwestern University - Department of Economics ( email )

2003 Sheridan Road
Evanston, IL 60208
United States

Scott Duke Kominers (Contact Author)

Harvard University ( email )

Rock Center
Harvard Business School
Boston, MA 02163
United States

HOME PAGE: http://www.scottkom.com/

Mohammad Akbarpour

Stanford University ( email )

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