Policymakers often introduce rules constraining transactions in individual markets—such as rent control—or even choose to distribute scarce resources by circumventing markets completely, as is frequently the case for health care or transit. Yet, traditional economic intuition opposes these sorts of policies because—unlike well-functioning markets—they introduce allocative inefficiency.
In this project, I will explore the optimal design of marketplaces in the presence of underlying inequalities between participants, developing a theory of Inequality-aware Market Design (IMD). My approach is to deploy a mechanism-design framework that identifies the optimal way to structure the market. In the baseline framework, the designer maximizes a welfare function whose welfare weights reflect her redistributive preferences induced by the inequalities between participants. Market participants may have private information both about their willingness to trade and their welfare weights.
Research will focus on testing the validity and scope of the main hypothesis: When inequalities are sufficiently pronounced and can be detected based on agents’ behavior in the market, it becomes optimal to sacrifice allocative efficiency to achieve a more desirable split of surplus. For example, optimal market designs may involve inefficient rationing.
Inequality-aware Market Design provides a novel way to address the growing problem of inequality in market-design settings. The redistributive objective distinguishes this theory from the traditional mechanism-design literature that has focused predominantly on efficiency and revenue as design goals; the focus on optimal allocation rules in a single marketplace complements the public-finance approach to redistribution through the tax system. IMD provides policy guidance by explaining whether and how policymakers concerned about inequality should resort to distortionary market interventions.
- HORIZON.1.1 - European Research Council (ERC) Main Programme