Redistributive Allocation Mechanisms

Many scarce public resources are allocated below market-clearing prices (and sometimes for free). Such ``non-market'' mechanisms necessarily sacrifice some surplus, yet they can potentially improve equity by increasing the rents enjoyed by agents with low willingness to pay. In this paper, we develop a model of mechanism design with redistributive concerns. Agents are characterized by a privately observed willingness to pay for quality, and a publicly observed label. A market designer controls allocation and pricing of a set of objects of heterogeneous quality, and maximizes a linear combination of revenue and total surplus---with Pareto weights that depend both on observed and unobserved agent characteristics. We derive structural insights about the form of the optimal mechanism and describe how social preferences influence the use of non-market mechanisms.