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Screening while Controlling an Externality

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  • Franz Ostrizek

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)

  • Elia Sartori

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 nonmonotonicity in virtual values arising from the countervailing impact of payoffand 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

  • Franz Ostrizek & Elia Sartori, 2023. "Screening while Controlling an Externality," SciencePo Working papers Main hal-04023835, HAL.
    • Handle: RePEc:hal:spmain:hal-04023835
    DOI: 10.1016/j.geb.2023.01.011
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-04023835
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    More about this item

    Keywords

    Multidimensional Screening; Externality; Ironing; Network Goods; 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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