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Optimal Choice of Characteristics for a Non-Excludable Good

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  • Brocas, Isabelle
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    Abstract

    I consider a model where a principal decides whether to produce one unit of an indivisible good (e.g. a private school) and which characteristics it will contain (emphasis on language or science). Agents (parents) are differentiated along two substitutable dimensions: a vertical parameter that captures their privately known valuation for the good (demand for private education), and an horizontal parameter that captures their observable differences in preferences for the characteristics. I analyze the optimal mechanism offered by the principal to allocate the good and show that the principal will produce a good with characteristics more on the lines of the preferences of the agent with the lowest valuation. Furthermore, if the principal has also a private valuation for the good, he will bias the choice of the characteristics against his own preferences.

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    Bibliographic Info

    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5704.

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    Date of creation: May 2006
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    Handle: RePEc:cpr:ceprdp:5704

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    Related research

    Keywords: allocation mechanisms; externalities; mechanism design; non-excludable goods; vertical and horizontal differentiation;

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    1. Maskin, Eric & Tirole, Jean, 1990. "The Principal-Agent Relationship with an Informed Principal: The Case of Private Values," Econometrica, Econometric Society, vol. 58(2), pages 379-409, March.
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    7. Ilya Segal & Michael D. Whinston, 2003. "Robust Predictions for Bilateral Contracting with Externalities," Econometrica, Econometric Society, vol. 71(3), pages 757-791, 05.
    8. Jean Tirole & Jean-Jaques Laffont, 1985. "Using Cost Observation to Regulate Firms," Working papers 368, Massachusetts Institute of Technology (MIT), Department of Economics.
    9. Groves, Theodore, 1973. "Incentives in Teams," Econometrica, Econometric Society, vol. 41(4), pages 617-31, July.
    10. Wildasin, David E., 1979. "Local public goods, property values, and local public choice," Journal of Urban Economics, Elsevier, vol. 6(4), pages 521-534, October.
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    12. Cornelli, Francesca, 1996. "Optimal Selling Procedures with Fixed Costs," Journal of Economic Theory, Elsevier, vol. 71(1), pages 1-30, October.
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