Auctions With Type-Dependent and Negative Externalities: The Optimal Mechanism

43 Pages Posted: 21 Nov 2007

See all articles by Isabelle Brocas

Isabelle Brocas

University of Southern California - Department of Economics

Date Written: November 2007

Abstract

We analyze optimal auction design in the presence of negative externalities. We assume that externalities are a function of both the valuation of the agent who suffers it and the valuation of the agent who obtains the good. This introduces two different sources of countervailing incentives: the reservation utility of each bidder becomes type-dependent and the equilibrium utility is not necessarily increasing in the agent's valuation. We characterize the properties of the optimal mechanism when externalities are "strongly decreasing", "weakly decreasing" and "increasing" in the agent's valuation. Last, we discuss its implementation with sealed-bid auctions. Interestingly, bidding strategies are not necessarily increasing in valuations, and the optimal mechanism can be implemented by setting a price ceiling instead of a reserve price.

Keywords: Auctions, type-dependent externalities, countervailing incentives, mechanism design

JEL Classification: D44, D62

Suggested Citation

Brocas, Isabelle, Auctions With Type-Dependent and Negative Externalities: The Optimal Mechanism (November 2007). IEPR Working Paper No. 07.15, Available at SSRN: https://ssrn.com/abstract=1031532 or http://dx.doi.org/10.2139/ssrn.1031532

Isabelle Brocas (Contact Author)

University of Southern California - Department of Economics ( email )

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HOME PAGE: http://www-rcf.usc.edu/~brocas/

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