Redistribution through Markets

67 Pages Posted: 20 Mar 2018 Last revised: 31 Mar 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: March 28, 2019

Abstract

When macroeconomic tools fail to respond to wealth inequality optimally, regulators can still seek to mitigate inequality within individual markets. A social planner with distributional preferences might distort allocative efficiency to achieve a more desirable split of surplus, for example, by setting higher prices when sellers are poor – effectively, using the market as a redistributive tool.

In this paper, we seek to understand how to design goods markets optimally in the presence of inequality. Using a mechanism design approach, we uncover the constrained Pareto frontier by identifying the optimal trade-off between allocative efficiency and redistribution in a setting where the second welfare theorem fails because of private information and participation constraints. 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

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

Suggested Citation

Dworczak, Piotr and Kominers, Scott Duke and Akbarpour, Mohammad, Redistribution through Markets (March 28, 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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