Dynamic Mechanism Design without Monetary Transfers: A Queueing Theory Approach

Abstract: We study the design of optimal allocation mechanisms in an environment where agents and goods arrive stochastically. Agents have private types that determine the principal payoff. Either agents or goods can be held in a queue at a flow cost until allocation. The principal cannot use monetary transfers, but can verify agents types at a cost. We characterize the optimal mechanism at the steady state of the system. It is a dynamic threshold mechanism in which the principal sets type thresholds for agent admission and goods allocation. These thresholds depend on the current state of the mechanism. The model applies to public programs such as public housing and grant allocation, and to allocation problems within organizations such as capital budgeting.