Contracting with Asymmetric Externalities

  • Eyal Winter | Hebrew University and Center for the Study of Rationality

We model situations in which a principal provides incentives to a group
of agents to participate in a project (such as a social event, commercial
activity or the adoption of a certain technological standartization).
Agents’ benefits from participation depend on the identity of other
participating agents. We assume bilateral externalities and characterize the
optimal incentive mechanism. Using a graph-theoretic approach we show that
the optimal mechanism provides a ranking of incentives for the agents, which
can be described as arising from a virtual popularity tournament among the
agents (similar to ones carried out by sport associations). Rather than simply
ranking agents according to their measure of popularity, the optimal mechanism
makes use of more refined two-way comparison between the agents. An
implication of our analysis is that higher levels of asymmetry of externalities
between the agents enable a reduction of the principal’s payment. In addition,
contrary to intuition, an increase in the aggregate externalities, does not
necessarily decrease principal’s payment, nor does it change agents rewards.

http://www.ma.huji.ac.il/~mseyal/documents/multiagent_October_2008B.pdf

Speaker Details

Professor Eyal Winter is the Silverzweig Professor of Economics and the director of the Center for the Study of Rationality at the Hebrew University of Jerusalem. His publications can be found at http://www.ma.huji.ac.il/~mseyal/

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