Mechanism Design with Financially Constrained Agents and Costly Verification*

Yunan Li ()
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Yunan Li: Department of Economics, City University of Hong Kong

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: A principal wishes to distribute an indivisible good to a population of budget-constrained agents. Both valuation and budget are an agent’s private information. The principal can inspect an agent’s budget through a costly verification process and punish an agent who makes a false statement. I characterize the direct surplus-maximizing mechanism. This direct mechanism can be implemented by a two-stage mechanism in which agents only report their budgets. Specifically, all agents report their budgets in the first stage. The principal then provides budget dependent cash subsidies to agents and assigns the goods randomly (with uniform probability) at budget-dependent prices. In the second stage, a resale market opens, but is regulated with budget-dependent sales taxes. Agents who report low budgets receive more subsidies in their initial purchases (the first stage), face higher taxes in the resale market (the second stage) and are inspected randomly. This implementation exhibits some of the features of some welfare programs, such as Singapore’s housing and development board.

Keywords: Mechanism Design; Budget Constraints; Efficiency; Costly Verification (search for similar items in EconPapers)
JEL-codes: D45 D61 D82 H42 (search for similar items in EconPapers)
Pages: 124 pages
Date: 2017-01-18, Revised 2017-01-18
New Economics Papers: this item is included in nep-mic and nep-sea
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Citations: View citations in EconPapers (4)

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