Incorporating Income Disparity and Utility Heterogeneity in Resource Allocation

Abstract. Problem definition: Efficient allocation of a divisible resource and its associated costs among consumers is a critical issue in many societal decision-making scenarios. This decision is especially difficult when consumers have heterogeneous incomes and private levels of resource utility. Common approaches in practice often overlook either utility heterogeneity or income disparity, leaving a significant gap between potential and actual outcomes. We develop and analyze a resource allocation method to bridge this gap. Methodology/results: Our model incorporates consumer heterogeneity in both income levels and private utility from the resource. We formulate the problem of allocating the resource and its associated costs or savings as a mechanism design problem, aiming to maximize aggregate consumer welfare. We propose a mechanism that offers consumers income-dependent menus (IDMs) of quantity and cost (or savings) options, and uncover structural properties of these menus. Our IDM approach significantly outperforms the considered alternatives in a numerical study calibrated using real-world data. Managerial implications: In the realm of resource allocation where both income and resource utility levels are heterogeneous, significant welfare gains can be realized by judiciously leveraging the dual dimensions of heterogeneity. Implementing our IDM approach ensures that consumers receive and contribute to resources in a manner that reflects their financial capacities and utility levels, maximizing overall welfare. Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2024.1163 .