We study the project allocation mechanisms trade-off between minimizing the waste of resources in the application process and maximizing the match of needs and projects when the recipient’s needs and resources are private information. We propose a signaling mechanism where the set of signals available to each agent is constrained by his capacity and by his truthful need of the project. The principal can control, at a given cost, the agent’s application cost and the utility of receiving the project by non-needy agents. Our findings suggest that there exists a threshold in the principal’s budget such that for smaller budgets, all instruments are used in the optimal mechanism, while for bigger budgets the optimal application complexity is independent of the budget and waste of resources is a decreasing share of the resources available.
Journal of Economics, vol. 99, February 2010, pp. 1–28