Targeting Without Transfers

Abstract: I study the welfare-maximizing allocation of heterogeneous goods when monetary transfers are prohibited. Agents have private cardinal values, and the designer chooses a non-monetary mechanism subject to incentive compatibility and aggregate supply constraints. I characterize implementable allocations and give sufficient conditions under which the optimum coincides with a competitive equilibrium with equal incomes (CEEI). When these conditions fail, I characterize the optimum for two symmetric goods. I show that when narrow preference margins between goods predict greater need, the designer can sometimes benefit from distorting CEEI by offering a menu containing pure options and bundles.