Optimal Choice of Characteristics for a Non-Excludable Good
University of Southern California - Department of Economics
IEPR Working Paper No. 06.52
I consider a model where a principal decides whether to produce one unit of an indivisible good (e.g. a private school) and which characteristics it will contain (emphasis on language or science). Agents (parents) are differentiated along two substitutable dimensions: a vertical parameter that captures their privately known valuation for the good (demand for private education), and an horizontal parameter that captures their observable differences in preferences for the characteristics. I analyze the optimal mechanism offered by the principal to allocate the good and show that the principal will produce a good with characteristics more on the lines of the preferences of the agent with the lowest valuation. Furthermore, if the principal has also a private valuation for the good, he will bias the choice of the characteristics against his own preferences.
Number of Pages in PDF File: 31
Keywords: Allocation mechanisms, non-excludable goods, vertical and horizontal differentiation, mechanism design, externalities
JEL Classification: D44, D62working papers series
Date posted: May 31, 2006
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