Resource Allocation with Positive Externalities
33 Pages Posted: 21 Oct 2016 Last revised: 24 Nov 2017
Date Written: November 22, 2017
In several common allocation problems, transfers are unavailable, but incentives are partially aligned because the allocation to one player entails positive, though imperfect, externalities to the other. We study the extent to which a designer can exploit this alignment when allocating a budget between two players. We identify a natural mechanism, the infinite hierarchical mechanism, which partitions the type space into a countably infinite set of intervals and allocates the budget to the player in the highest interval. If both players are in the same interval, it divides the budget evenly. An appealing feature is that a designer can implement this mechanism without commitment power, and the mechanism is optimal among those implementable without commitment. Our main result shows that this mechanism remains optimal with full commitment power if the hazard rate of the type distribution is monotone, and the density is single peaked.
JEL Classification: D82, D44, D72
Suggested Citation: Suggested Citation