Screening while controlling an externality

We propose a tractable framework to introduce externalities in screening model. Agents differ both payoff-type and influence-type (ranking how beneficial their actions are for others). Applications range from pricing network goods regulating industries that create externalities. Inefficiencies arise only if the is unobservable. When dimensions unobserved, optimal allocation satisfies lexicographic monotonicity: increasing along satisfy incentive compatibility, but tilted towards influential agents move externality socially desirable direction. In particular, depends on private characteristic payoff-irrelevant agent. characterize solution through two-step ironing procedure addresses non-monotonicity virtual values arising countervailing impact of payoff- influence-type. Rents influence can emerge indirectly, i.e. when observed level used as signal unobserved payoff-type.