Screening while controlling an externality

Franz Ostrizek and Elia Sartori

Games and Economic Behavior, 2023, vol. 139, issue C, 26-55

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.

Keywords: Multidimensional screening; Externality; Ironing; Influence (search for similar items in EconPapers)
JEL-codes: D42 D62 D82 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Screening while Controlling an Externality (2023)
Working Paper: Screening while Controlling an Externality (2023)
Working Paper: Screening while Controlling an Externality (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:139:y:2023:i:c:p:26-55

DOI: 10.1016/j.geb.2023.01.011

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