Optimal Choice of Characteristics for a Non-Excludable Good

31 Pages Posted: 31 May 2006

See all articles by Isabelle Brocas

Isabelle Brocas

University of Southern California - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: May 2006

Abstract

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.

Keywords: Allocation mechanisms, non-excludable goods, vertical and horizontal differentiation, mechanism design, externalities

JEL Classification: D44, D62

Suggested Citation

Brocas, Isabelle, Optimal Choice of Characteristics for a Non-Excludable Good (May 2006). IEPR Working Paper No. 06.52, Available at SSRN: https://ssrn.com/abstract=905307 or http://dx.doi.org/10.2139/ssrn.905307

Isabelle Brocas (Contact Author)

University of Southern California - Department of Economics ( email )

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