Governments sometimes impose price controls and nonprice rationing-by-queuing. Profit-seeking firms occasionally ration by putting their customers on “allocation.” Following Barzel [1974] and Deacon and Sonstelie [1985], we take the decision to ration as a given and analyze it, employing standard microeconomics and applied welfare economics. This paper adds to the literature by focusing on optimally rationing a good across markets. Further, we estimate the actual welfare cost of improper allocation across markets in the U. S. gasoline crises of 1973–1974 and 1979.

We examine the choice of organizational mode for a two-stage production process wherein cost realizations at each stage are observed only by the producing party. When these costs are positively correlated, the principal prefers to undertake second-stage production herself. When the correlation is negative and sufficiently small, she will prefer that the agent who performs the first stage also perform the second. For large negative correlation, either mode might be preferred. When costs are uncorrelated, the principal is indifferent between modes.