Mechanism design with financially constrained agents and costly verification

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

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Original languageEnglish
Pages (from-to)1139-1194
Journal / PublicationTheoretical Economics
Issue number3
Publication statusPublished - 26 Jul 2021



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.

Research Area(s)

  • Mechanism design, budget constraints, efficiency, costly verification

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