The Efficiency of Rationing and Resale∗

Housing, health care, and education are often rationed in the sense that the allocation process involves non-market mechanisms. We study rationing in a market in which some buyers face binding wealth constraints and resale is permitted. Buyers with a high willingness-to-pay for a good but a low ability-to-pay may not acquire it in a free market. Rationing gives these buyers a chance to acquire the good, possibly at the expense of buyers with a high willingness-to-pay and high ability-to-pay. Rationing also lets some buyers with a low willingness-to-pay acquire the good, but the latter buyers will resell the good to the former. The ultimate allocation with rationing and resale is more efficient than if the free market had allocated the good. We also show that needbased rationing rules that favor the poor produce a more efficient allocation than need-blind rules; need-based rules may even achieve full efficiency. The crucial role played by resale suggests that its introduction may improve existing schemes that utilize rationing. Moreover, the introduction of rationing and resale together may be beneficial for allocating many goods and services.