Economic Theory Seminar - Bing Liu (Stanford)

Title: Externalities and mechanism design

Abstract: We show that the independent private values model with continuous distributions accommodates externalities according to which each agent's payoff depends on its own type and the allocation of goods to every agent. We revisit classic problems including efficient and optimal auctions, bilateral trade and the publicity of a  public good. We show that the designer extracts revenue from negative externalities through incentive compatibility. High enough negative externalities permit ex post efficient trade when that is not possible without externalities. On a network structure, the degree of publicity of a good depends on the level of positive externalities. We encapsulate these problems in a model that allows for general ownership structures. We characterize the optimal mechanisms that maximize a Ramsey objective with potentially different welfare weights of the agents. We apply the model to incomplete information bargaining between a seller and several buyers when buyers experience externalites.