Promoting efficiency and equity through institutional design

This paper develops and experimentally tests an institution that is specifically designed to promote efficiency without sacrificing equity. The principal result of the analysis is that the institution developed here performs well in the sense that efficiency is increased for a wide range of different initial distributions of wealth. The framework developed in this paper is relevant to policy makers who are interested in implementing more efficient institutions, but who are constrained by the political environment in which they operate.The author is currently a senior staff economist with the Council of Economic Advisers on leave from Carnegie Mellon University. The views in this paper represent those of the author and do not necessarily reflect those of the Council. I would like to thank Roger Noll for helpful comments and suggestions and Charles Cuny and Jim Merino for valuable research assistance. This research was funded in part by the California Air Resources Board and the National Science Foundation.