Ulric B. and Evelyn L. Bray Social Sciences Seminar

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.

Prof. Kominers will be joined by guests Sera Linardi, Associate Professor of Economics at the University of Pittsburgh, and Alex Teytelboym, Associate Professor of Economics at the University of Oxford.

How to view Caltech Econ Theory Seminars:
Sign up for a free twitch.tv account, and tune in on Wednesdays at 12 PM PST on twitch.tv/caltechecontheory. You will be able to ask questions on the Twitch chat.