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A Solution to the Problem of Externalities When Agents Are Well-Informed

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  • Varian, Hal R

Abstract

The author describes a class of simple two-stage mechanisms that implement efficient allocations as subgame-perfect equilibria for economic environments involving externalities. These mechanisms, known as compensation mechanisms, solve a wide variety of externalities problems, including implementation of Lindahl allocations, regulation of monopoly, and efficient solutions to the prisoner's dilemma. Copyright 1994 by American Economic Association.

Suggested Citation

  • Varian, Hal R, 1994. "A Solution to the Problem of Externalities When Agents Are Well-Informed," American Economic Review, American Economic Association, vol. 84(5), pages 1278-1293, December.
    • Handle: RePEc:aea:aecrev:v:84:y:1994:i:5:p:1278-93
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    References listed on IDEAS

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    1. Andreoni,J. & Varian,H., 1999. "Pre-play contracting in the prisoners' dilemma," Working papers 18, Wisconsin Madison - Social Systems.
    2. Mark Bagnoli & Barton L. Lipman, 1989. "Provision of Public Goods: Fully Implementing the Core through Private Contributions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 56(4), pages 583-601.
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    More about this item

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • D2 - Microeconomics - - Production and Organizations
    • D3 - Microeconomics - - Distribution
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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