An Efficient and Egalitarian Negotiation Procedure for Economies with Externalities

We construct a simple mechanism that can be used in situations when a group of well informed agents try to cooperate in the production and allocation of a good with external effects. We start by auctioning the right to have the initiative in the negotiation, then the winner proposes an allocation that is implemented if the rest of the players unanimously accept it. In case of a rejection, the process is started again. We show that the outcome of any stationary subgame perfect Nash equilibrium leads to an efficient allocation of the good with externalities, together with an equal split of the surplus that cooperation generates.