Market versus Non-Market Assignment of Initial Ownership
39 Pages Posted: 3 May 2007
Date Written: November 28, 2006
We study the assignment of initial ownership of a good when agents differ in their ability to pay. Selling the good at the market-clearing price favors the wealthy in the sense that they may acquire the good instead of poor buyers who value it more highly. Non-market assignment schemes, even simple random rationing, may yield a more efficient allocation than the competitive market would - if recipients of the good are allowed to resell. Schemes that favor the poor are even more desirable in that context. The ability to resell the good is critical to the results, but allowing resale also invites speculation, which undermines its effectiveness. If the level of speculation is sufficiently high, restricting resale may be beneficial.
Keywords: efficiency, non-market assignment, need-based scheme, resale, speculation
JEL Classification: D44, D45, H42, I38, K11
Suggested Citation: Suggested Citation