Resource Allocation with Positive Externalities

Abstract

We study a budget allocation problem between two players where budget allocations entail positive externalities. We characterize an optimal mechanism when the designer is unable to commit ex ante to the allocation rule. Without commitment, every incentive compatible mechanism the designer can implement is a hierarchical mechanism --- the allocation rule partitions the type space into intervals and allocates the budget to the player in the highest interval, dividing it evenly if both are in the same interval. The optimal mechanism uses a partition with infinitely many intervals. With full commitment power, this hierarchical mechanism remains optimal for a family of distributions that includes the uniform.