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Title:Auction design with fairness concerns: Subsidies vs. set-asides PDF Logo
Authors:Pai, Mallesh M.
Vohra, Rakesh
Issue Date:2012
Series/Report no.:Discussion Paper, Center for Mathematical Studies in Economics and Management Science 1548
Abstract:Government procurement and allocation programs often use subsidies and setasides favoring small businesses and other target groups to address fairness concerns. These concerns are in addition to standard objectives such as efficiency and revenue. We study the design of the optimal mechanism for a seller concerned with efficiency, subject to a constraint to favor a target group. In our model, buyers' private values are determined by costly pre-auction investment. If the constraint is distributional, i.e. to guarantee that the target group wins sufficiently often, then the constrained efficient mechanism is a flat subsidy. This is consistent with findings in the empirical literature. In contrast, if the constraint is to ensure a certain investment level by the target group, the optimal mechanism is a type dependent subsidy. In this case a set aside may be better than a flat or percentage subsidy.
Subjects:auctions
subsidies
JEL:D44
H57
Document Type:Working Paper
Appears in Collections:Discussion Papers, Kellogg School of Management, Northwestern University

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