Negative Externalities and Evolutionary Implementation

We model externality abatement as an implementation problem. A social planner would like to ensure efficient behavior among a group of agents whose actions are sources of externalities. However, the planner has limited information about the agents' preferences, and he is unable to distinguish individual agents except through their action choices. We prove that if a concavity condition on aggregate payoffs is satisfied, the planner can guarantee that efficient behavior is globally stable under a wide range of behavior adjustment processes by administering a variable pricing scheme. Through a series of applications, we show that the concavity condition is naturally satisfied in settings involving negative externalities. We conclude by contrasting the performance of the pricing mechanism with that of a mechanism based on direct revelation and announcement dependent forcing contracts. JEL Classification Numbers: C61, C72, C73, D62, D82, R41, R48 * I thank Jeff Ely, Philippe Jehiel, Larry Samuelson, Jörgen Weibull, three anonymous referees, and a Managing Editor, as well as seminar participants at Harvard, the Royal Institute of Technology (Stockholm), the Stockholm School of Economics, Wisconsin, the 2001 Valencia Game Theory Conference, the 2002 Econometric Society Winter Meeting, the 2002 Case Western Reserve University Learning Conference, and the 2002 Society for Economic Dynamics Meeting for helpful comments and discussions. Financial support from the National Science Foundation (SES-0092145) is gratefully acknowledged.