Optimal choice of characteristics for a nonexcludable good.

(10) This has been the case, for instance, of the Lycee International de Los Angeles combining a French education with an international component (www.lilaschool.com).

(11) An agent cannot decide to produce the good on his own. Under this alternative assumption, the outside option would be type dependent and countervailing incentives would arise (see Maggi and Rodriguez, 1995; Jullien, 2000). Besides, the decision of each agent to produce the good would also affect the outside option of the other agent. This analysis is out of the scope of the present article. However, we analyze in Section 4. the case in which one agent designs the contract (that is, becomes the principal) and produces the good.

(12) If this expression is always positive (respectively negative), then [r.sub.i]([[theta].sub.j], x) [equivalent to] [[theta].bar] (respectively [r.sub.i]([[theta].sub.j], x) [equivalent to] [bar.[theta]].

(13) In other words, our setting can be reinterpreted as the auction of a divisible good under the restriction that the auctioneer must either keep the good or allocate it entirely between the bidders.

(14) Note that the problem is formally different from the allocation of a good to one person. Therefore, the proof does not follow Myerson (1981) and needs to be adapted to our specific contracting problem.

(15) We take a neutral approach even though in the case of local public goods, it is conceivable that the manager of the jurisdiction acts more on behalf of a certain type of residents. The objective function of local authorities as well as the subsequent effect on optimal provision of local public goods are addressed in urban economics. See, for instance, Hamilton (1975), Wildasin (1979), and Scotchmer (1994), among others. See also Scotchmer (2002).

(16) The seminal analyses of regulation under asymmetric information are Baron and Myerson (1982) and Laffont and Tirole (1986). In the first paper, society attaches a higher weight to consumers than to firms. In the second one, each party has equal weight but transfers are costly. Both models yield similar insights.

(17) For a thoughtful analysis of contracting with an informed principal, see Maskin and Tirole (1990, 1992).

Isabelle Brocas, University of Southern California and CEPR; brocas@usc.edu.

I am grateful to Juan Carrillo, Philippe Marcoul, Mike Riordan, Guofu Tan, Oscar Volij, the editor, and two anonymous referees for useful comments. I also thank seminar participants at University of Southern California (Economics and Business School), Iowa State University, and the 19th Annual Congress of the EEA in Madrid. A previous, version of the article has circulated under the title "Multi-agent contracts with positive externalities."