On-line Appendix (Optimal group selection)
Abstract: A principal contracts with agents organized in a network of local complementarities, in order to increase the sum of efforts. How does the network structure affect optimal contracts? The paper shows that both efforts and transfers are deeply impacted by the existence of synergies between contracting and non-contracting agents. Moreover, such synergies may lead the principal to offer no contract to central agents.
Abstract: We study the value of network information in the context of monopoly pricing under local network externalities. Under complete information, both monopoly and consumers know the network structure and consumers' private preferences. Under incomplete information, consumers only know the joint distribution of preferences, in-degrees and out-degrees, and the monopoly knows the characteristics of each consumer. The analysis reveals that, under assortative mixing, network information increases profit and consumer surplus.