Optimal Redistribution Through Public Provision of Private Goods
49 Pages Posted: 28 Jan 2021 Last revised: 16 Aug 2021
Date Written: December 1, 2020
How does a private market influence the optimal design of a public program? In this paper, I study a designer who has preferences over how a public option and a private good are allocated. However, she can design only the public option. Her design affects the distribution of consumers who purchase the private good—and hence equilibrium outcomes. I characterize the optimal mechanism and show how it can be computed explicitly. I derive comparative statics on the value of the public option and show that the optimal mechanism generally rations the public option. Finally, I examine implications on the optimal design when the designer can intervene in the private market or introduce an individual mandate.
Keywords: public option, redistribution, rationing, public provision, mechanism design
JEL Classification: C61, D47, D61, D63, D82
Suggested Citation: Suggested Citation