Maximal Procurement under a Budget

TL;DR

This paper analyzes optimal mechanisms for a principal influencing an agent's actions under a finite, ex-post budget constraint, revealing how incentives and resource value interact to shape the mechanism design.

Contribution

It endogenizes the resource's value and characterizes the optimal mechanism, including the emergence of a pooling region and the effects of resource value on agent incentives.

Findings

Pooling region where budget constraint binds for low-cost types

Mechanism demands more from high-value resource agents

Resource value influences incentive structure and resource allocation

Abstract

We study the problem of a principal who wants to influence an agent's observable action, subject to an ex-post budget. The agent has a private type determining their cost function. This paper endogenizes the value of the resource driving incentives, which holds no inherent value but is restricted by finite availability. We characterize the optimal mechanism, showing the emergence of a pooling region where the budget constraint binds for low-cost types. We then introduce a linear value for the transferable resource; as the principal's value increases, the mechanism demands more from agents with binding budget constraint but less from others.