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Optimal selling mechanisms with countervailing positive externalities and an application to tradable retaliation in the WTO

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  • Chen, Bo
  • Potipiti, Tanapong
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Abstract

We study revenue-maximizing mechanisms for a seller who sells an indivisible good to several buyers with positive, type-dependent and countervailing allocative externalities. To cope with the difficulty of types obtaining reservation utilities being endogenously determined, we first solve a minimax version of the seller's problem by generalizing Myerson's characterization techniques for the non-regular case. The solution is then shown to solve the seller's original maximin problem as well in our setting. We find that the seller's optimal mechanism normally features bunching even in the regular case and the type with the lowest expected payoff is typically not an extreme type. As an important illustration of our characterization procedures, we apply our results to the problem of selling retaliation rights in the WTO.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Mathematical Economics.

Volume (Year): 46 (2010)
Issue (Month): 5 (September)
Pages: 825-843

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Handle: RePEc:eee:mateco:v:46:y:2010:i:5:p:825-843

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Web page: http://www.elsevier.com/locate/jmateco

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Keywords: Optimal auctions Countervailing externalities Retaliation WTO;

References

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  1. Grossman, Gene & Helpman, Elhanan, 1993. "Protection for Sale," CEPR Discussion Papers, C.E.P.R. Discussion Papers 827, C.E.P.R. Discussion Papers.
  2. Bagwell, Kyle & Mavroidis, Petros C. & Staiger, Robert W., 2007. "Auctioning countermeasures in the WTO," Journal of International Economics, Elsevier, Elsevier, vol. 73(2), pages 309-332, November.
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  5. Hector Chade & Jorge Aseff, . "An Optimal Auction with Identity-Dependent Externalities," Working Papers, Department of Economics, W. P. Carey School of Business, Arizona State University 2133477, Department of Economics, W. P. Carey School of Business, Arizona State University.
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  8. ehiel, Philippe & Benny Moldovanu & Ennio Stacchetti, 1994. "How (not) to sell nuclear weapons," Discussion Paper Serie B, University of Bonn, Germany 288, University of Bonn, Germany.
  9. Bagwell,K. & Staiger,R.W., 1998. "An economic theory of GATT," Working papers, Wisconsin Madison - Social Systems 15, Wisconsin Madison - Social Systems.
  10. Maggi G. & Rodriguez-Clare A., 1995. "On Countervailing Incentives," Journal of Economic Theory, Elsevier, Elsevier, vol. 66(1), pages 238-263, June.
  11. Jorge Aseff & Hector Chade, 2008. "An optimal auction with identity-dependent externalities," RAND Journal of Economics, RAND Corporation, RAND Corporation, vol. 39(3), pages 731-746.
  12. Jullien, Bruno, 2000. "Participation Constraints in Adverse Selection Models," Journal of Economic Theory, Elsevier, Elsevier, vol. 93(1), pages 1-47, July.
  13. Jehiel, Philippe & Moldovanu, Benny & Stacchetti, Ennio, 1999. "Multidimensional Mechanism Design for Auctions with Externalities," Journal of Economic Theory, Elsevier, Elsevier, vol. 85(2), pages 258-293, April.
  14. Bester, Helmut & Strausz, Roland, 2001. "Contracting with Imperfect Commitment and the Revelation Principle: The Single Agent Case," Econometrica, Econometric Society, Econometric Society, vol. 69(4), pages 1077-98, July.
  15. Baldwin, Richard, 1987. "Politically realistic objective functions and trade policy PROFs and tariffs," Economics Letters, Elsevier, Elsevier, vol. 24(3), pages 287-290.
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Cited by:
  1. Bhirombhakdi, Kornpob & Potipiti, Tanapong, 2012. "Practically Implementable Auction for a Good with Countervailing Positive Externalities," MPRA Paper 42911, University Library of Munich, Germany.
  2. Isabelle Brocas, 2013. "Optimal allocation mechanisms with type-dependent negative externalities," Theory and Decision, Springer, Springer, vol. 75(3), pages 359-387, September.
  3. Brocas, Isabelle, 2014. "Countervailing incentives in allocation mechanisms with type-dependent externalities," Journal of Mathematical Economics, Elsevier, Elsevier, vol. 50(C), pages 22-33.

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