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This article characterizes the efficiency properties of competitive economies with financial constraints, in which phenomena such as fire sales and financial amplification may arise. We show that financial constraints lead to two distinct types of pecuniary externalities: distributive externalities that arise from incomplete insurance markets and collateral externalities that arise from price-dependent financial constraints. For both types of externalities, we identify three sufficient statistics that determine optimal taxes on financing and investment decisions to implement constrained efficient allocations. We also show that fire sales and financial amplification are neither necessary nor sufficient to generate inefficient pecuniary externalities. We demonstrate how to employ our framework in a number of applications. Whereas collateral externalities generally lead to over-borrowing, the distortions from distributive externalities may easily flip sign, leading to either under- or over-borrowing. Both types of externalities may lead to under- or over-investment.

We combine a theoretical discrete-choice model of vehicle purchases, an econometric analysis of electricity emissions, and the AP2 air pollution model to estimate the geographic variation in the environmental benefits from driving electric vehicles. The second-best electric vehicle purchase subsidy ranges from $2,785 in California to —$4,964 in North Dakota, with a mean of —$1,095. Ninety percent of local environmental externalities from driving electric vehicles in one state are exported to others, implying they may be subsidized locally, even when the environmental benefits are negative overall. Geographically differentiated subsidies can reduce deadweight loss, but only modestly.

In a product market where consumers are open to uninformed purchases, we study competition between a traditional and an online retailer in the presence of showrooming. Several results are obtained. First, showrooming intensifies competition and lowers both firms’ profits, thus supporting traditional and online retailers’ recent strategy of carrying more exclusive varieties. Second, lowering consumer search costs may aggravate showrooming and decrease the traditional retailer’s profits for intermediate search costs. Third, opening an online store expands the demand of the traditional retailer but intensifies competition, thus lowering its profits under certain conditions. Fourth, a return policy by the online retailer alleviates showrooming and relaxes competition but weakly reduces its demand, increasing its profits only for intermediate search costs. The return policy (weakly) increases the traditional retailer’s profits. Fifth, when search cost is not high enough, price matching by the traditional retailer may also intensify competition and hurt its profits. We then examine how webrooming interacts with showrooming. When webrooming resolves partial match uncertainty, it may increase both firms’ profits by inducing more consumers to participate. The online appendix is available at https://doi.org/10.1287/mksc.2018.1084 .

Decentralization can improve service delivery, but it can also generate externalities across jurisdictional boundaries. We examine the nature and size of water pollution externalities as rivers flow across jurisdictions. Panel data on water pollution in Brazilian rivers coupled with county splits that change the locations of borders allow us to identify the spatial patterns of pollution as rivers approach and cross borders, controlling for fixed effects and trends specific to each location. The theory of externalities predicts that pollution should increase at an increasing rate as the river approaches the downstream exit border, that there should be a structural break in the slope of the pollution function at the border, and that a larger number of managing jurisdictions should exacerbate pollution externalities. We find support for all four predictions in the data. Satellite data on growth in night-time lights along rivers show that local authorities allow more settlements to develop close to rivers in the downstream portions of counties, which is the likely underlying mechanism. The border effects on pollution are not as pronounced when the cost of inter-jurisdictional coordination is lower.

In the expansion of volumes of industrial production, there is an increase of anthropogenic influence and deterioration of the external environment that became the reason for the impossibility of a functioning market system without taking into account negative externalities. The article considers the directions and principles of a “green economy” functioning as the basis for further development of society. The current state and trends of the impact of environmental factors on other indicators of quality of life have been analysed and comparative analysis has been made on the example of developed and developing countries. Effective indices and instruments of influence on the level of ecological and economic development and main tendencies and problems arising at the introduction of “green economy”, have been considered. The use of indicators that take into account negative externalities, such as the Pigouvian tax, has been demonstrated to be more visible than widely used indices. The losses from the negative impact on the resulting economic indicators have been analysed, and a significant decrease in the per capita GDP level has been proved with the extensive development of the economy.Implications for Central European audience: This paper aims to contribute to the development of a green economy as part of a policy aimed at reducing environmental risks in the process of economic growth. The proposed indicators and tools for influencing the level of environmental and economic development arising from the implementation of the “green economy” as the main vector of sustainable development, which can be used further research and development and can be implemented by European companies.

We study games in which a network mediates strategic spillovers and externalities among the players. How does a planner optimally target interventions that change individuals’ private returns to investment? We analyze this question by decomposing any intervention into orthogonal principal components, which are determined by the network and are ordered according to their associated eigenvalues. There is a close connection between the nature of spillovers and the representation of various principal components in the optimal intervention. In games of strategic complements (substitutes), interventions place more weight on the top (bottom) principal components, which reflect more global (local) network structure. For large budgets, optimal interventions are simple—they essentially involve only a single principal component.

We explain why dominant firms give away good-quality products for free when network externalities are present. Despite its immense popularity, the freemium business model remains a complex strategy to master and often a topic of heated debate. Adopting a generalized version of the screening framework, we ask when and why a firm should endogenously offer a zero price on its low-end product when users’ product usages generate network externalities on each other. In the standard screening framework without network effects, freemium never emerges as optimal, and the firm always chooses the efficient price point for its low-end product. We show that even with network effects, freemium is typically not optimal. When network effects are identical across products (“symmetric”), the firm has greater incentive to expand its network size and may find it profitable to sell to the low-end customers. However, this does not lead to freemium as an equilibrium strategy. Instead, the firm should offer a low-end product to attract customers, while keeping its price positive. Freemium can only emerge if the high- and low-end products provide different levels of (“asymmetric”) marginal network effects. In other words, the firm would set a zero price for its low-end product only if the high-end product provided larger utility gain from an expansion of the firm’s user base. In contrast to conventional beliefs, a firm pursuing the freemium strategy might increase the baseline quality on its low-end product above the “efficient” level, which seemingly reduces differentiation. The online appendices are available at https://doi.org/10.1287/mksc.2018.1109 .

In auctions with externalities, it is well-known that the core can be empty, which is undesirable both in terms of stability and \"fairness.\" Nevertheless, some auction outcome must be chosen. We separate deviations into two types: deviations by paying more and deviations by refusing to pay. In high-stakes auctions where bidders also care about their reputation, the latter are unlikely to occur, or else can be prevented by legal interventions. In contrast, the former is more undesirable in the sense that the seller and the bidders experience justified envy. We show that the core is nonempty if bidders cannot refuse to pay.

Managers of emerging platforms must decide what level of platform performance to invest in at each product development cycle in markets that exhibit two-sided network externalities. High performance is a selling point for consumers, but in many cases it requires developers to make large investments to participate. Abstracting from an example drawn from the video game industry, we build a strategic model to investigate the trade-off between investing in high platform performance versus reducing investment in order to facilitate third party content development. We carry out a full analysis of three distinct settings: monopoly, price-setting duopoly, and price-taking duopoly. We provide insights on the optimum investment in platform performance and demonstrate how conventional wisdom about product development may be misleading in the presence of strong cross-network externalities. In particular, we show that, contrary to the conventional wisdom about \"winner-take-all\" markets, heavily investing in the core performance of a platform does not always yield a competitive edge. We characterize the conditions under which offering a platform with lower performance but greater availability of content can be a winning strategy.

As a digital financial innovation, equity crowdfunding (ECF) allows investors to exploit the complementarity of information provision and network effects in a reduced transaction cost environment. We build on the underlying distinction between soft and hard information and show that ECF platforms create an environment of greater information pooling that benefits from network externalities. We test our hypotheses using a unique proprietary dataset and find that soft information has a greater impact than hard on the likelihood that a financing pitch will be successful. Moreover, the effects of soft information are amplified by the size of the investor network on the platform and network size also positively moderates the effect of information on the amount invested during each pitch. We conclude that ECF platforms can successfully exploit low transaction costs of the digital environment and bring network externalities to bear on investor decisions. Taken together that these increase the supply of funds to entrepreneurs.