A solution of the externality problem using strategic matching

Joel M. Guttman, Adi Schnytzer

Research output: Contribution to journalArticlepeer-review

11 Scopus citations

Abstract

This paper develops a Coase-like solution of the problem of inducing Pareto optimal behavior in the presence of reciprocal externalities. In place of Coasean direct compensation between the parties to an externality problem, actors strategically match each other's externality-producing activity, and thus induce counterparts to internalize the external benefits or costs of their actions. The analysis suggests a general framework for analyzing social interactions in the presence of reciprocal externalities. As an application of the theory, a solution of the duopoly problem is noted.

Original languageEnglish
Pages (from-to)73-88
Number of pages16
JournalSocial Choice and Welfare
Volume9
Issue number1
DOIs
StatePublished - Jan 1992

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