Coordination and externalities

We analyze the gains of coordinating decisions in a regulatory Framework in which agents are sovereign and tax inducements are socially costly. We consider a general multi-agent situation with externalities among agents, incomplete information, and type-dependent reservation utilities. When the regulator (optimally) leaves informational rents to the most efficient agents, centralized coordination reduces global activity. Coordination induces more activity when the principal (optimally) leaves rents to the most inefficient agents. Last, if we impose budget balance, our mechanism can also be interpreted as the optimal auction of a public good with congestion externalities. (C) 1998 Academic Press.