The probabilistic serial mechanism with private endowments

Abstract

A random assignment is ordinally efficient if it is not stochastically dominated with respect to individual preferences over sure objects. When there are no private endowments, the set of ordinally efficient random assignments is characterized by the eating algorithm (Bogomolnaia and Moulin, 2001). When there are private endowments, the main requirement is individual rationality; however, the eating algorithm fails to deliver this property. Our contribution is the natural generalization of the eating algorithm for this general class of problems. The family of this generalized eating algorithm characterizes the set of individually rational and ordinally efficient random assignments. A special solution in this family, the individually rational probabilistic serial (PS(IR)), also achieves a new fairness axiom, no justified-envy. However, it is not immune to strategic manipulation. We show that individual rationality, no justified-envy and strategy-proofness are incompatible.