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Journal Articles Games and Economic Behavior Year : 2023

Screening while Controlling an Externality

Franz Ostrizek
Elia Sartori
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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.
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Dates and versions

hal-04023835 , version 1 (10-03-2023)



Franz Ostrizek, Elia Sartori. Screening while Controlling an Externality. Games and Economic Behavior, 2023, 139, pp.26-55. ⟨10.1016/j.geb.2023.01.011⟩. ⟨hal-04023835⟩
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