Screening while Controlling an Externality

Franz Ostrizek and Elia Sartori

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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.

Keywords: Multidimensional Screening; Externality; Ironing; Network Goods; Influence (search for similar items in EconPapers)
Date: 2023-05
New Economics Papers: this item is included in nep-des and nep-mic
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Citations: View citations in EconPapers (3)

Published in Games and Economic Behavior, 2023, 139, pp.26-55. ⟨10.1016/j.geb.2023.01.011⟩

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Journal Article: 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:hal:journl:hal-04023835

DOI: 10.1016/j.geb.2023.01.011

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