Providing a public good that causes a local harm to its host poses two problems previously unexplored together: where to locate it and how large it should be. We propose a mechanism combining some market-like properties with a modified second-price auction. The mechanism selects a host, a facility size, a compensation for hosting the project, and determines how the compensation is split among the non-hosts. If each community bids truthfully for becoming the host–a strategy from which no community has incentives to deviate–the selected allocation is globally optimal, even if communities’ preferences are private information. In contrast with the literature, the host pays the second-highest bid while receiving the market benefits to prevent distortions in the optimal size.
We address organizations that rely on donors, when those donors are motivated by making a difference. We show that when donors care sufficiently about their marginal impact, firms use practices that would normally be deemed inefficient. These include prioritizing less valuable opportunities over better ones, investing most in their weakest initiatives, and benefiting from not identifying the quality of their projects. These all arise from a distinction between marginal and average returns generated by donor preferences.
In many economic decisions, people estimate probabilities, such as the likelihood that a risk materializes or that a job applicant will be a productive employee, by retrieving experiences from memory. We model this process based on two established regularities of selective recall: similarity and interference. We show that the similarity structure of a hypothesis and the way it is described (not just its objective probability) shape the recall of experiences and thus probability assessments. The model accounts for and reconciles a variety of empirical findings, such as overestimation of unlikely events when these are cued versus neglect of noncued ones, the availability heuristic, the representativeness heuristic, conjunction and disjunction fallacies, and over- versus underreaction to information in different situations. The model yields several new predictions, for which we find strong experimental support.