Sanchez Villalba, Miguel A
(2007)
On the design of incentive mechanisms in the presence of externalities.
PhD thesis, London School of Economics and Political Science.
Abstract
In a world of ever increasing interrelations among people, firms and countries, externalities become more and more significant as time passes by and, consequently, incentive schemes that overlook them will fail to fulfil their objectives. This dissertation analyses how those schemes are affected by the presence of externalities by focusing on some special cases. Depending on the type of externality involved, the cases can be labelled as either "endogenous" (if it is created by the designer's choice of scheme) or "exogenous" (otherwise). The analysis of the latter case finds that delegation of contracting rights improves the efficiency of a multi-agent organisation because it closes the gap between society's and agents' marginal benefits. The analysis of endogenous externalities, on the other hand, shows that sometimes the designer's optimal action is to create an externality between agents and to take full advantage of the new interactions thus generated. These findings indicate that when externalities are present incentive schemes can be radically affected and, moreover, that the mechanism designer may have incentives to create externalities between agents in order to advance her goals. These effects are illustrated using leading examples and experimental data.
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