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Screening while Controlling an Externality

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Abstract

We propose a tractable framework to introduce externalities into a monopolist screening model. Agents differ both in their payoff type and their influence, i.e. how strongly their action affects the aggregate externality. Applications range from non-linear pricing of a network good, to taxation or subsidization of industries that produce externalities (e.g. pollution and human capital formation). When both dimensions are unobserved (full screening) the optimal allocation satisfies lexicographic monotonicity: within a payoff-type, the monopolist optimally tilts the allocation towards influential agents to increase the externality, while standard IC drives monotonicity across payoff-types. We characterize the solution through a two-step ironing procedure that addresses the nonmonotonicity in virtual values arising from the countervailing impact of payoff-types and influence. The allocation is inefficient if and only if the payoff-type is unobservable. Only influence is observable, equilibrium utility can vary across the latter as it is used as a signal of the payoff-type. We provide sufficient conditions for (expected) rents from influence to emerge.

Suggested Citation

  • Franz Ostrizek & Elia Sartori, 2021. "Screening while Controlling an Externality," CSEF Working Papers 605, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  • Handle: RePEc:sef:csefwp:605
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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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