Multi-Agent Initiatives with Type Dependent Externalities∗

We model situations in which a principal provides incentives to a group of agents to participate in a project (such as a social event or a commercial activity). Agents’ benefits from participation depend on the identity of other participating agents. We assume bilateral externalities and characterize the optimal incentive mechanism. Using a graph-theoretic approach we show that the optimal mechanism provides a ranking of incentives for the agents, which can be described as arising from a virtual popularity tournament among the agents. One implication of our analysis is that higher levels of asymmetry of externalities enable a reduction of the principal’s payment. In addition, a slight change in the externality that an agent induces on others can result in a substantial change in the payment that he receives from