Non-Market Allocation Mechanisms: Optimal Design and Investment Incentives

Abstract

We study how to optimally design selection mechanisms, accounting for agents' investment incentives. A principal wishes to allocate a resource of homogeneous quality to a heterogeneous population of agents. The principal commits to a possibly random selection rule that depends on a one-dimensional characteristic of the agents she intrinsically values. Agents have a strict preference for being selected by the principal and may undertake a costly investment to improve their characteristic before it is revealed to the principal. We show that even if random selection rules foster agents' investments, especially at the top of the characteristic distribution, deterministic "pass-fail" selection rules are in fact optimal.

Error in Lemma 8's proof (App. B.7): $\beta$ lacks sufficient regularity for the integration by parts used to derive ${\varphi }^{\prime }(0)$. While $\beta$ has bounded variation, allowing Lebesgue-Stieltjes integration by parts, this introduces additional terms from jump discontinuities in $\beta$ (due to discontinuities in $u^{\prime }$). These can be negative, undermining Lemma 9 (App. B.8). A fix is underway