We consider a general mechanism-design environment in which the planner faces incentive constraints such as the ones resulting from agents' private information or ability to take hidden actions. We study the properties of optimal mechanisms when some decisions are incentive-separable: A set of decisions is incentive-separable if, starting at some initial allocation, perturbing these decisions along agents' indifference curves preserves incentive constraints. We show that, under regularity conditions, the optimal mechanism allows agents to make unrestricted choices over incentive-separable decisions, given some prices and budgets. Using this result, we extend and unify the Atkinson-Stiglitz theorem on the undesirability of differentiated commodity taxes and the Diamond-Mirrlees production efficiency result. We also demonstrate how the analysis of incentive separability can provide a novel justification for in-kind redistribution programs similar to food stamps.
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Inequality-aware market design
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.
This work was supported by the ERC Starting grant IMD-101040122 "Inequality-Aware Market Design". Views and opinions expressed are those of the author only and do not necessarily reflect those of the European Union or the European Research Council. Neither the European Union nor the granting authority can be held responsible for them.
General audience communications:
IMD provides policy guidance by explaining whether and how policymakers concerned about inequality should resort to distortionary market interventions.
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.
IMD Days bring together researchers and students interested in understanding the role of markets and policy in addressing the problem of inequality. The goal of the workshop is to create bridges between fields (economic theory, public finance, welfare economics, applied microeconomics) and discuss different perspectives and approaches (theoretical and empirical). IMD Days will feature a few longer talks in a “summer school style” as well as shorter “conference style” talks. The program will create ample opportunities for long conversations and networking.
For more information, please visit IMD Days 2025 webpage.
@article{doligalski2023incentive,
title={Incentive separability},
author={Doligalski, Pawe{\l} and Dworczak, Piotr and Krysta, Joanna and Tokarski, Filip},
year={2023},
institution={Group for Research in APplied Economics},
type = {Working Paper},
number = {85}
}