Theoretical Economics, Volume 16, Number 3 (July 2021)

Theoretical Economics 16 (2021), 1139–1194

Mechanism design with financially constrained agents and costly verification

Yunan Li


A principal distributes an indivisible good to budget-constrained agents when both valuation and budget are agents' private information. The principal can verify an agent's budget at a cost. The welfare-maximizing mechanism can be implemented via a two-stage scheme. First, agents report their budgets, receive cash transfers, and decide whether to enter a lottery over the good. Second, recipients of the good can sell it on a resale market but must pay a sales tax. Low-budget agents receive a higher cash transfer, pay a lower price to enter the lottery, and face a higher sales tax. They are also randomly inspected.

Keywords: Mechanism design, budget constraints, efficiency, costly verification

JEL classification: D45, D61, D82, H42

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