Optimal allocation mechanisms with type-dependent negative externalities (Q368060)

This article studies auctions with negative externalities in the case of externalities depending on the agent's valuation. More precisely, it analyzes the optimal auction design for linear type-dependent negative externalities. The article characterizes the optimal allocation mechanism and shows that the allocation mechanism will depend on whether the externality is ``increasing'' or ``strongly decreasing'' in the agent's valuation. The author proves that if the externality suffered by the agent increases with his valuation, the equilibrium utility of the agent is non-monotonic in the valuation. If the externality strongly decreases with his valuation, the good might be sold to the agent with lowest valuation. The article then discusses the implementation of the optimal mechanism with sealed-bid auctions. It demonstrates that if a second-price sealed-bid auction is used, then bids are not necessarily increasing in valuations. In addition, to implement the optimal auction, the seller should opt for a bid-dependent price ceiling.