Mechanism design with financially constrained agents and costly verification

Abstract

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.