Screening while Controlling an Externality

Franz Ostrizek and Elia Sartori ()
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Elia Sartori: CSEF, https://csef.it/people/elia-sartori/

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

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.

Keywords: Multidimensional screening; Externality; Ironing; Influence (search for similar items in EconPapers)
JEL-codes: D42 D62 D82 (search for similar items in EconPapers)
Date: 2021-02-03
New Economics Papers: this item is included in nep-gth and nep-mic
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Published in Games and Economic Behavior, Volume 139, May 2023, Pages 26-55

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Related works:
Journal Article: Screening while controlling an externality (2023)
Working Paper: Screening while Controlling an Externality (2023)
Working Paper: Screening while Controlling an Externality (2023)
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