Working Paper: CEPR ID: DP5704
Authors: Isabelle Brocas
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; externalities; mechanism design; non excludable goods; vertical and horizontal differentiation
JEL Codes: D44; D62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Principal's choice of characteristics (C52) | Agent's utility (D11) |
| Principal's bias in favor of lower valuation agent (G40) | Reduction of informational rents left to agents (D82) |
| Reduction of informational rents left to agents (D82) | Increase in overall utility for the principal (G19) |
| Principal's private valuation for the good (D46) | Bias against his own preferences (D91) |
| Asymmetric information (D82) | Bias towards the agent with the lowest valuation (D82) |
| Asymmetric information (D82) | More extreme choices in characteristics of the good (D01) |
| Optimal contract under asymmetric information (D82) | Commitment not to produce the good when valuations are low (D43) |