Bidding for the surplus: realizing efficient outcomes in economic environments

In this paper, we consider a local public goods environment. The agents are faced with the task of providing local public goods that will benefit some or all of them. We propose a bidding mechanism whereby agents bid for the right to decide upon the organization of the economic activity. The subgame perfect equilibria of the mechanism generate efficient outcomes. We also show how to adapt the mechanism to network economies where the economic activity takes place via the formation of links.  2003 Elsevier Inc. All rights reserved. JEL classification: H41; C72; C71