Allocating Scarce Resources in the Presence of Private Information and Bargaining Power

This paper studies optimal schemes for allocating scarce resources to agents with private demand information and heterogeneous bargaining powers. Through an investigation of a mechanism design model that aims to induce agents to report their demands truthfully, we find the following results. First, when the principal purely cares about social welfare and when the principal has sufficient resources to satisfy all agents’ demands, we find that the optimal allocation scheme is “efficient” because it is identical to the optimal scheme for the benchmark case in which bargaining power differentials and information asymmetry are both absent. Second, when rationing is needed due to resource scarcity, we show that heterogeneity in bargaining power cross agents will cause the principal to allocate more resources to agents with stronger bargaining power even though their true demands are low, resulting in “inefficient” allocations. We show that there are circumstances that can reduce allocation inefficiency caused by bargaining power differentials. These circumstances are: (1) when the principal cares about both the social welfare and its own monetary benefits, and (2) when positive externality is present (i.e., allocating resources to one agent can benefit other agents)