Conference Agenda

Regulating externalities is particularly challenging in the presence of uncertainty and disagreement among economic agents. Traditional Pigouvian and Coasean approaches often fail because they require either precise knowledge of externality costs or frictionless bargaining. We propose an “uncertainty-based regulation” (UBR) mechanism that harnesses heterogeneous information and disagreement among firms to achieve socially efficient outcomes without requiring explicit information revelation. UBR modifies firms’ payoffs based on their deviation from the aggregate action, weighted by observable outcomes, effectively creating a synthetic market that internalizes externalities. This mechanism implicitly defines property rights, aligns incentives, and elicits private information without direct negotiation. We show that UBR achieves team efficiency, dominates conventional regulation, incentivizes information acquisition, and remains robust even when firms distrust each others’ signals. Moreover, if brought to a vote, it would receive unanimous support, making it politically viable.