Dynamic Inefficiency in Resource Allocation: Evidence from Vehicle License Lotteries in Beijing

Abstract

The efficiency of resource allocation is often analyzed in a static framework with a focus on
the cross-sectional heterogeneity in the willingness to pay among users. When the resource
is durable in nature, the temporal heterogeneity could be important in assessing the efficiency
properties of different allocation mechanisms. This paper uses a dynamic model to empirically
quantify the efficiency outcome of using lotteries to allocate resources among forward-looking
consumers. In the context of the lottery policy to allocate limited vehicle licenses in Beijing,
our analysis shows that lotteries significantly affect intertemporal decisions in that households
participate in lotteries at least six months earlier than their intended vehicle purchase time in
the absence of the policy. The welfare loss due to early participation (i.e. dynamic inefficiency)
accounts for nearly half of the total welfare loss from lotteries relative to the first-best alloca-
tion. The analysis highlights the importance of accounting for dynamics in designing resource
allocation mechanisms.

Keywords: Dynamic inefficiency, Lottery, Resource Allocation

JEL Classification: Q58, R48