ABSTRACT This paper studies a principal's problem of assigning a job to one of a set of candidate agents, in the presence of a spillover effect on the agents who are not assigned the job. Such a spillover effect is commonly seen in various contexts. We consider the job assignment mechanisms that (a) maximize social welfare without money transfer, (b) maximize social welfare with budget balancing, or (c) maximize the principal's revenue. When a money transfer is forbidden, we show that the structure of the optimal mechanism is driven by two conflicting forces: The winning and the free‐riding effects. If one effect dominates the other, the allocation outcome cannot achieve social efficiency because the agents are incentivized not to tell the truth. When a money transfer is allowed, however, our results suggest that a socially efficient outcome can always be brought about. In the case of revenue maximization, we show that the principal will design the mechanism in a way that discourages free‐riding behaviors. We extend our model in several directions, and the implications from these extensions are discussed.