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Screening while controlling an externality

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  • Ostrizek, Franz
  • Sartori, Elia

Abstract

We propose a tractable framework to introduce externalities in a screening model. Agents differ in both payoff-type and influence-type (ranking how beneficial their actions are for others). Applications range from pricing network goods to regulating industries that create externalities. Inefficiencies arise only if the payoff-type is unobservable. When both dimensions are unobserved, the optimal allocation satisfies lexicographic monotonicity: increasing along the payoff-type to satisfy incentive compatibility, but tilted towards influential agents to move the externality in the socially desirable direction. In particular, the allocation depends on a private characteristic that is payoff-irrelevant for the agent. We characterize the solution through a two-step ironing procedure that addresses the non-monotonicity in virtual values arising from the countervailing impact of payoff- and influence-type. Rents from influence can emerge but only indirectly, i.e. when the observed level of influence is used as a signal of the unobserved payoff-type.

Suggested Citation

  • Ostrizek, Franz & Sartori, Elia, 2023. "Screening while controlling an externality," Games and Economic Behavior, Elsevier, vol. 139(C), pages 26-55.
    • Handle: RePEc:eee:gamebe:v:139:y:2023:i:c:p:26-55
    DOI: 10.1016/j.geb.2023.01.011
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    More about this item

    Keywords

    Multidimensional screening; Externality; Ironing; Influence;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D62 - Microeconomics - - Welfare Economics - - - Externalities

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