On Efficient Distribution with Private Information.

This paper is the study of the dynamics of the efficient distribution of consumption in an exchange economy with many consumers, each of whom is subject to private, idiosyncratic taste shocks. The authors propose a recursive method for finding feasible allocations that are incentive-compatible and that are Pareto optimal within this set. The method is applied to several parametric examples. The authors find that in an efficient allocation the degree of inequality continually increases, with a diminishing fraction of the population receiving an increasing fraction of the resources. They discuss the extent to which these allocations can be decentralized via market arrangements. Copyright 1992 by The Review of Economic Studies Limited.