Redistribution through markets

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 substantial 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 within-side inequality, meanwhile, it may be optimal to impose price controls even though doing so induces rationing.

Published version

@Article{RePEc:wly:emetrp:v:89:y:2021:i:4:p:1665-1698, author={Piotr Dworczak and Scott Duke Kominers and Mohammad Akbarpour}, title={{Redistribution Through Markets}}, journal={Econometrica}, year=2021, volume={89}, number={4}, pages={1665-1698}, month={July}, doi={10.3982/ECTA16671}, }