Targeting Without Transfers

TL;DR

This paper explores how to allocate heterogeneous goods efficiently without monetary transfers, identifying conditions where a competitive equilibrium with equal incomes is optimal and proposing mechanisms for cases where it is not.

Contribution

It provides conditions under which welfare-maximizing allocations align with CEEI and characterizes optimal mechanisms for two goods when conditions fail.

Findings

Optimal allocation coincides with CEEI under certain conditions.

Distorted mechanisms can outperform CEEI when preferences are narrowly aligned.

Characterization of optimal mechanisms for two symmetric goods.

Abstract

I study the welfare-maximizing allocation of heterogeneous goods when monetary transfers are prohibited. Agents have private cardinal values, and the designer chooses a non-monetary mechanism subject to incentive compatibility and aggregate supply constraints. I provide sufficient conditions under which the optimal mechanism coincides with a competitive equilibrium with equal incomes (CEEI). When these conditions fail, I characterize the optimum for two symmetric goods. I show that when narrow preference margins between goods predict greater need, the designer can sometimes benefit from distorting CEEI by offering a menu containing pure options and bundles.