Welfare Maximizing Allocation Without Transfers

17 Pages Posted: 26 May 2020 Last revised: 29 Jul 2020

See all articles by Mustafa Dogan

Mustafa Dogan

MIT Sloan School of Management

Metin Uyanik

School of Economics, University of Queensland

Date Written: April 27, 2020

Abstract

This paper studies welfare maximizing allocation of indivisible objects to ex-ante identical agents in the absence of monetary transfers. The agents, each with a unit demand, share a common ranking of the objects, and are privately informed about their own valuations. The structure of the optimal allocation policy depends on the agents' relative valuation of the objects and the variation of this relative valuation across different types. When this variation is small, the required loss of welfare for eliciting agents' private information exceeds its benefits. In this case, evenly randomized allocation is optimal. When this variation is significantly large, it is optimal to waste the less preferred object---not always allocate it to agents---to provide necessary incentives for information elicitation. The planner then uses this information to increase the frequency of allocating the more preferred object to the agent favored by the first best policy. Regardless of the size of the variation, it is never optimal to waste the more preferred object. We also propose an exchange game that implements the incentive efficient allocation.

Keywords: resource allocation, allocative efficiency, asymmetric information, mechanism design without transfers

JEL Classification: D02, D78, D82

Suggested Citation

Dogan, Mustafa and Uyanik, Metin, Welfare Maximizing Allocation Without Transfers (April 27, 2020). Economics Letters, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3586246 or http://dx.doi.org/10.2139/ssrn.3586246

Mustafa Dogan (Contact Author)

MIT Sloan School of Management ( email )

100 Main Street
Cambridge, MA 02142
United States

HOME PAGE: http://sites.google.com/view/mustafadogan

Metin Uyanik

School of Economics, University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

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