Redistribution Through Markets

Piotr Dworczak, Scott Duke Kominers*, Mohammad Akbarpour

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

3 Scopus citations

Abstract

Policymakers frequently use price regulations as a response to inequality in the markets they control. In this paper, we examine the optimal structure of such policies from the perspective of mechanism design. We study a buyer-seller market in which agents have private information about both their valuations for an indivisible object and their marginal utilities for money. The planner seeks a mechanism that maximizes agents' total utilities, subject to incentive and market-clearing constraints. We uncover the constrained Pareto frontier by identifying the optimal trade-off between allocative efficiency and redistribution. We find that competitive-equilibrium allocation is not always optimal. Instead, when there is 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 same-side inequality that can be uncovered by market behavior, it may be optimal to impose price controls even though doing so induces rationing.

Original languageEnglish (US)
Pages (from-to)1665-1698
Number of pages34
JournalEconometrica
Volume89
Issue number4
DOIs
StatePublished - Jul 2021

Keywords

  • inequality
  • Mechanism design
  • redistribution
  • welfare theorems

ASJC Scopus subject areas

  • Economics and Econometrics

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