Inequality-aware Market Design -- an ERC Starting Grant funded by the European Commission -- 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.
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, we explore the optimal design of marketplaces in the presence of underlying inequalities between participants, developing a theory of Inequality-aware Market Design (IMD). The 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 focuses 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, as shown in our first paper on the topic (Dworczak ® Akbarpour ® Kominers, 2021), optimal market designs may involve inefficient rationing.
Źródło finansowania | Financing: European Commission through ERC Starting Grant (GA #101040122)
Projekt realizowany | Timeline: 07/2022 -- 07/2027
Kierownik | Principal Investigator: Piotr Dworczak
Budżet łączny | Total budget: 1 191 561 EUR
- wynagrodzenia dla podstawowych wykonawców | compensation to researchers: 647 000 EUR
- stypendia dla młodych badaczy | scholarships for young scholars: 153 200 EUR
- komputery i oprogramowanie | hardware and software: 9 044 EUR
- konferencje i inne wyjazdy | conference travels: 141 205 EUR
- materiały i usługi obce | usables and outsourced services: 74 122 EUR
- koszty pośrednie dla FAME | overheads for FAME: 236 000 EUR
The IMD project has two key objectives. The first and leading objective is to develop a comprehensive theory of Inequality-aware Market Design (IMD). We will study the question of optimal redistribution in the framework of mechanism design. This approach marries the equity-efficiency trade-off (extensively analyzed in the public-finance literature) with the focus on the design of a single marketplace in the tradition of market and mechanism design. The optimal redistribution question is posed by assuming that the designer's objective function includes social welfare weights that can depend on agents' observed and unobserved characteristics. The social welfare weights allow the designer to account for the consequences of inequalities between market participants; their inclusion sets the framework apart from the traditional mechanism-design analysis which has been, with notable exceptions discussed below, oblivious to these inherent inequalities.
The second, complementary objective is to establish IMD as an emerging field within economic theory by actively building the research community, promoting its importance, and creating links to neighboring research areas. On top of developing the theory, we will engage in activities aimed at establishing IMD as a new area within economic theory, with strong connections to existing research communities. The strategy to achieve this objective consists of two sets of activities, derived naturally from the fact that IMD lies at the intersection of two fields, mechanism design and public finance.
Mohammad Akbarpour, Graduate School of Business, Stanford University
Mohammad's research interests include market design, redistributive mechanisms, and network theory. Within these fields he investigates subjects as disparate as auctions, dynamic matching, kidney markets, redistributive policies, and diffusion in networks.
Eric Budish, Booth School of Business, University of Chicago
Budish’s main area of research is market design, with specific topics studied including financial markets, matching markets, ticket markets, blockchains and cryptocurrencies, and incentives for innovation.
Scott Duke Kominers, Entrepreneurial Management Unit, Harvard Business School; Harvard Department of Economics; Harvard Center of Mathematical Sciences and Applications; a16z crypto
Scott's research interests include mathematical economics, market and mechanism design, matching theory, game theory, innovation, law and economics, eminent domain, patent policy, agglomeration, predictive cities and economics of entry.
Shengwu Li, Economics Department, Harvard University
Shengwu's main research areas are microeconomic theory, behavioral and experimental economics, matching and market design.
Opublikowane | Published
Redistribution through markets | Econometrica Przeczytaj streszczenie | Read abstract
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.
W toku | Work in progress
Equity-efficiency trade-off in quasi-linear environments Przeczytaj streszczenie | Read abstract
I study a simple equity-efficiency problem: A designer allocates a fixed amount of money to a population of agents differing in privately-observed marginal values for money. She can only screen agents by asking them to burn utility (through some socially wasteful activity). I show that giving a lump-sum payment is outperformed by a mechanism with utility burning when the agent with the lowest money-denominated cost of engaging in the wasteful activity has an expected value for money that exceeds the average value by more than a factor of two.
An economic framework for vaccine prioritization Przeczytaj streszczenie | Read abstract
We propose an economic framework for determining the optimal allocation of a scarce supply of vaccines that become gradually available during a public health crisis, such as the Covid-19 pandemic. Agents differ in observable and unobservable characteristics, and the designer maximizes a social welfare function over all feasible mechanisms—accounting for agents’ characteristics, as well as their endogenous behavior in the face of the pandemic. The framework emphasizes the role of externalities and incorporates equity as well as efficiency concerns. Our results provide an economic justification for providing vaccines immediately and for free to some groups of agents, while at the same time showing that a carefully constructed pricing mechanism can improve outcomes by screening for individuals with the highest private and social benefits of receiving the vaccine. The solution casts light on the classic question of whether prices or priorities should be used to allocate scarce public resources under externalities and equity concerns.
Redistributive allocation mechanisms Przeczytaj streszczenie | Read abstract
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.
The IMD seminar is a series of talks by researchers from various fields (market and mechanism design, public finance, development economics, industrial organization) interested in understanding how markets should be designed in the presence of systematic inequalities among the participants. The seminar has an interdisciplinary character and features both theoretical and empirical papers.
The IMD seminar is a biweekly event taking place in hybrid format. If you would like to be added to our mailing list (and obtain the Zoom link), please email IMD@grape.org.pl or fill out the sign-up form.
We're meeting on Wednesdays at 5pm CET (11am EST/ 8am PST)
Abstract 1 (Optimal sin taxation and market power):
This paper studies the design of sin taxes when firms exercise market power. We outline an optimal tax framework that highlights how market power impacts the efficiency and redistributive properties of sin taxation, and quantify these effects in an application to sugar sweetened beverage taxation. We estimate a detailed model of demand and supply for the UK drinks market, which we embed in our tax design framework to solve for optimal sugar sweetened beverage tax policy. Positive price-cost margins on sugar sweetened drinks create allocative distortions, which act to lower the optimal rate compared with a perfectly competitive setting. However, since profits accrue to the rich, this is partially mitigated under social preferences for equity. Overall, ignoring market power when setting the optimal sugar sweetened beverage tax rate leads to welfare gains that are 40% below those at the optimum. We show that moving from a single tax rate on sugar sweetened beverages (common in practice) to a multi-rate system can result in further substantial welfare gains, with much of these gains realized by instead taxing sugar content directly.
Abstract 2 (Price floors and externality correction):
We evaluate the impact of a price floor for alcohol introduced in Scotland in 2018, using a difference-in-differences strategy with England as a control group. We show that the policy led to the largest reductions in alcohol units purchased among the heaviest drinkers—the group who, at the margin, are likely to create the largest externalities from drinking. The price floor is well targeted at heavy drinkers because they buy a much greater fraction of their units from cheap products and switched away from these products strongly, with only limited substitution towards more expensive products. We show that if the marginal external cost of drinking is at least moderately higher for heavy than lighter drinkers, then a price floor outperforms an ethanol tax. However, more flexible tax systems can achieve similar reductions in externalities to the price floor, but avoid the large transfers from public funds to the alcohol industry that arise under the floor.
We revisit the classical result that in a closed economy the incidence of corporate taxes on labor is approximately zero. We consider a rich general equilibrium framework, where agents differ in the level of their wealth as well as in their managerial and working ability. Potential entrepreneurs go through all the key decisions affected by corporate tax changes: the choice of (i) occupation, (ii) organizational form, (iii) investment, and (iv) financing structure. We allow both for the presence of financial frictions and the traditional tax advantage of debt over corporate equity, which jointly generate misallocation of capital and talent. In this environment we characterize the effects of increasing corporate taxes both analytically and for a calibrated version of the model. We show that this tax increase reallocates production from C corporations to pass-through businesses. Since, due to distorted prices, the latter have higher capital-labor ratios, this reallocation generates a reduction in labor productivity and wages. Furthermore, the corporate tax increase induces some C corporations to reorganize as pass-throughs, which implies more restricted access to external funds and thus a socially inefficient downsizing of production in these firms. Finally, the tax increase causes further misallocation of talent by inducing agents with low wealth relative to their managerial talent to switch from entrepreneurship to being workers, while the reverse happens for agents with higher wealth and lower managerial skills. Overall, we find that both labor and capital bear a large share of the corporate tax incidence, while entrepreneurs are net beneficiaries of the tax change.
10 August 2022: Zi Yang Kang (Stanford University), "Optimal Redistribution Through Public Provision of Private Goods", see more here.
5 October 2022: Raghav Malhotra (University of Warwick), "Rethinking Distribution: Introducing Market Segmentation as a Policy Instrument", see more here.
EC’22 Tutorial: Redistributive Market Design
Brief description: Many scarce public resources are allocated at below-market-clearing prices—and sometimes for free. Such “non-market” mechanisms necessarily sacrifice some surplus, yet they can potentially improve equity. In this tutorial, we show how tools that have been developed in the past 40 years in mechanism design theory can be employed to identify the optimal structure of such redistributive policies. This work sheds light on how and when it may make sense to use non-market allocation systems, such as rationing and priority mechanisms.
Decades of mechanism design theory has almost exclusively focused on “revenue" or "efficiency" maximization, and a large body of such studies have been presented at EC. In practice, however, policymakers frequently design allocation mechanisms to address “inequality" in the markets they control. We will show how mechanism design theory can be oriented around equity in addition to efficiency—resulting in strikingly different prescriptions for the optimal mechanism.
Target audience: Graduate students, researchers, and advanced undergraduate students.
Prerequisites: The tutorial will assume basic familiarity with mechanism design. Some background on redistributive policy design will be helpful, but not essential
Structure of the tutorial:
- Introduction, motivation, basis ideas (Scott, 15 minutes)
- What's the optimal price in a market with inequality? (Mohammad, 30 minutes)
- A mechanism-design approach (Piotr, 30 minutes)
- Conclusions, future directions, open problems (Scott, 15 minutes)
- Akbarpour, M. ® Dworczak, P. ® S. D. Kominers (2021): "Redistributive Allocation Mechnisms," Working paper
- Condorelli, D. (2013): "Market and non-market mechanisms for the optimal allocation of scarce resources," Games and Economic Behavior, 82, 582--591.
- Dworczak, P. ® S. D. Kominers ® M. Akbarpour (2021): "Redistribution through markets," Econometrica, 89, 1665--1698.
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- Fan, X., Y.-J. Chen, and C. S. Tang (2021): "Allocating Scarce Resources in the Presence of Private Information and Bargaining Power," HKUST Business School Research Paper No. 2021-021.
- Kang, M. and C. Z. Zheng (2020): "Pareto Optimality of Allocating the Bad," Working paper.
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