Who Cares More? Allocation with Diverse Preference Intensities

TL;DR

This paper studies optimal allocation rules for goods when individuals have diverse preference intensities, revealing that lotteries and disposal of services are key features in optimal and market-based solutions.

Contribution

It characterizes optimal allocation rules considering preference intensities known or private, highlighting the role of lotteries and disposal in achieving efficiency.

Findings

First-best allocations may include lotteries between high- and low-ranked goods.

Second-best allocations with private preferences involve lotteries and may match first-best allocations.

Disposal of services can be part of optimal allocations.

Abstract

Goods and services -- public housing, medical appointments, schools -- are often allocated to individuals who rank them similarly but differ in their preference intensities. We characterize optimal allocation rules when individual preferences are known and when they are not. Several insights emerge. First-best allocations may involve assigning some agents "lotteries" between high- and low-ranked goods. When preference intensities are private information, second-best allocations always involve such lotteries and, crucially, may coincide with first-best allocations. Furthermore, second-best allocations may entail disposal of services. We discuss a market-based alternative and show how it differs.