Efficient Bidding with Externalitites

• Authors: David Wettstein, David Pérez-Castrillo and Inés Macho-Stadler.
• BSE Working Paper: 159 | September 15
• Keywords: shapley value , Externalities , implementation , Bidding
• JEL codes: D62, C71
• shapley value
• Externalities
• implementation
• Bidding

We implement a family of efficient proposals to share benefits generated in environments with externalities. These proposals extend the Shapley value to games with externalities and are parametrized through the method by which the externalities are averaged. We construct two slightly different mechanisms: one for environments with negative externalities and the other for positive externalities. We show that the subgame perfect equilibrium outcomes of these mechanisms coincide with the sharing proposals.