We study an allocation problem where a set of objects needs to be allocated to agents arriving over time. The basic model is of the private, independent values type. The dynamically efficient allocation is implementable if the distribution of agents' values is known. Whereas lack of knowledge about the distribution is inconsequential in the static case, endogenous informational externalities arise if the designer gradually learns about the distribution by observing present values. These externalities may prevent the implementation of the dynamically efficient allocation. We provide necessary and sufficient conditions for the efficient allocation to be implementable.

We use the tools of mechanism design combined with the theory of risk measures to analyze how a cash-constrained owner of an asset with known, stochastic returns raises capital from a population of investors who differ in their risk aversion and budget constraints. The issuer partitions the asset’s cash flow into several asset-backed securities, one for each type of investor. The optimal partition conforms to the commonly observed practice of tranching into senior debt, junior debt, and equity. Tranching arises endogenously due to the differences in risk appetites among agents and in the budget constraints they face.

We study a generalization of the classical monopoly insurance problem under adverse selection (see Stiglitz 1977) where we allow for a random distribution of losses, possibly correlated with the agent’s risk parameter that is private information. Our model explains patterns of observed customer behavior and predicts insurance contracts most often observed in practice: these consist of menus of several deductible-premium pairs or menus of insurance with coverage limits–premium pairs. A main departure from the classical insurance literature is obtained here by endowing the agents with risk-averse preferences that can be represented by a dual utility functional (Yaari 1987).