An incentive efficient market for mechanisms in large Akerlof economies

We study ‘Akerlof economies’, that is, economies where goods come in qualities unknown to buyers, and sellers’ quality can be ranked. Cross-subsidies at the constrained efficient allocation arise, even when there are few high-quality types in the economy. Thus, Akerlof’s markets are poorly suited to deliver constrained efficient outcomes. We then design a competitive market for mechanisms. Agents buy lottery tickets to enter mechanisms, and the price system clears the markets. Firms offer tickets to mechanisms on the basis of ‘input’ prices which, unlike in Akerlof’s competitive markets, are quality dependent. Under standard sorting conditions, we show that a ‘no-price-cut’ competitive equilibrium exists and is incentive efficient.