We analyze a model of network formation where the costs of link formation are publicly known but individual benefits are not known to the social planner. The objective is to design a simple mechanism ensuring efficiency, budget balance, and equity. We propose two mechanisms towards this end; the first ensures efficiency and budget balance but not equity. The second mechanism corrects the asymmetry in payoffs through a two-stage variant of the first mechanism. Journal of Economic Literature Classification Numbers: C71, C72, D20.
Bibliographical noteFunding Information:
1We thank Francis Bloch, an associate editor and an anonymous referee for their comments on this paper. Some parts of this paper were written during the first author’s visits to the Center for Rationality and Interactive Decision Theory at The Hebrew University of Jerusalem and CORE, Belgium. He thanks these institutions for their hospitality and financial support. The second author thanks the European Commission for financial support through its TMR grant.
- Mechanism design
- Shapley value