Allocating Resources to Wealth-Constrained Agents∗

Governments have a profound impact on the allocation of many goods, services and rights. We study individuals who differ in their valuations and in their wealth. In particular, some individuals have binding wealth constraints, which inhibit voluntary exchange, so the initial assignment scheme matters. We show that non-market assignment schemes — even as simple as random rationing — may yield a more efficient allocation than a competitive market would, if initial assignees are allowed to resell. Need-based assignment schemes that favor the poor and merit-based schemes that favor those with high valuations are even more desirable. At the same time, non-market assignment invites speculation, which limits its benefit relative to the market. If speculation is prevalent, prohibiting transferability may be beneficial.