Redistribution Through Markets

Research Seminars

Policymakers frequently use price regulations as a response to inequality in the markets they control. In the paper presented in this Virtual Market Design Seminar, the authors examine the optimal structure of such policies from the perspective of mechanism design. They 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. They uncover the constrained Pareto frontier by identifying the optimal trade-off between allocative efficiency and redistribution. They 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.

The seminar series is jointly organized by ZEW, the University Paris 2 Panthéon-Assas, the Karlsruhe Institute of Technology (KIT), and the Universities of Bonn and Mannheim. Additional information on the Virtual MD Seminar Series.