Contracting with Heterogeneous Externalities | Zendy

Shai Bernstein | Zendy; Eyal Winter | Zendy

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Contracting with Heterogeneous Externalities

Author(s) -

Shai Bernstein,

Eyal Winter

Publication year - 2012

Publication title -

american economic journal microeconomics

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 5.339

H-Index - 40

eISSN - 1945-7685

pISSN - 1945-7669

DOI - 10.1257/mic.4.2.50

Subject(s) - externality , ranking (information retrieval) , microeconomics , stochastic game , tournament , principal (computer security) , revenue , popularity , simple (philosophy) , economics , principal–agent problem , computer science , mathematics , finance , psychology , social psychology , corporate governance , philosophy , epistemology , combinatorics , machine learning , operating system

We model situations in which a principal provides incentives to a group of agents to participate in a project (such as a social event or a commercial activity). Agents'bene…ts from participation depend on the identity of other participating agents. We assume bilateral externalities and characterize the optimal incentive mechanism. We show that the optimal mechanisms provide a ranking of incentives for the agents, which can be described as arising from a tournament among the agents (similar to ones carried out by sports associations). Rather then simply ranking agents according to a measure of popularity, the optimal mechanism makes use of a more re…ned two-way comparison between the agents. Using the structure of the optimal mechanism we derive results on the principal revenue extraction and the role of the level of externalities asymmetry.

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