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Auctions with a profit sharing contract

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  • Abhishek, Vineet
  • Hajek, Bruce
  • Williams, Steven R.
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    Abstract

    An auction is used to sell a resource that is then developed by the winning buyer to generate a profit. Two forms of payment are considered: (i) charging the winning buyer a one-time payment; (ii) charging an initial payment followed by a profit sharing contract (PSC) that divides the realized profit between the seller and the winning buyer. A symmetric interdependent values model with a risk neutral seller and either risk averse or risk neutral buyers is considered, along with the second price and English auctions. The properties of those PSCs in which either positive profits or both profits and losses are split according to a fixed fraction are studied. The sellerʼs expected revenue is shown to be larger in a class of general PSCs with nontrivial profit sharing than in an auction with only a one-time payment.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0899825612001558
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    Bibliographic Info

    Article provided by Elsevier in its journal Games and Economic Behavior.

    Volume (Year): 77 (2013)
    Issue (Month): 1 ()
    Pages: 247-270

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    Handle: RePEc:eee:gamebe:v:77:y:2013:i:1:p:247-270

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    Web page: http://www.elsevier.com/locate/inca/622836

    Related research

    Keywords: Selling a resource; Auction; Profit sharing contracts; Principal–agent relationship;

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    References

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    1. McAfee, R Preston & McMillan, John & Reny, Philip J, 1989. "Extracting the Surplus in the Common-Value Auction," Econometrica, Econometric Society, vol. 57(6), pages 1451-59, November.
    2. Bikhchandani, Sushil & Haile, Philip A. & Riley, John G., 2002. "Symmetric Separating Equilibria in English Auctions," Games and Economic Behavior, Elsevier, vol. 38(1), pages 19-27, January.
    3. Porter, Robert H, 1995. "The Role of Information in U.S. Offshore Oil and Gas Lease Auctions," Econometrica, Econometric Society, vol. 63(1), pages 1-27, January.
    4. Claudio Mezzetti, 2005. "Mechanism Design with Interdependent Valuations: Surplus Extraction," Discussion Papers in Economics 05/1, Department of Economics, University of Leicester, revised Mar 2006.
    5. Peter M. DeMarzo & Ilan Kremer & Andrzej Skrzypacz, 2005. "Bidding with Securities: Auctions and Security Design," American Economic Review, American Economic Association, vol. 95(4), pages 936-959, September.
    6. Hansen, Robert G, 1985. "Auctions with Contingent Payments," American Economic Review, American Economic Association, vol. 75(4), pages 862-65, September.
    7. Riley, John G, 1988. "Ex Post Information in Auctions," Review of Economic Studies, Wiley Blackwell, vol. 55(3), pages 409-29, July.
    8. Milgrom,Paul, 2004. "Putting Auction Theory to Work," Cambridge Books, Cambridge University Press, number 9780521536721, December.
    9. Cremer, Jacques & McLean, Richard P, 1988. "Full Extraction of the Surplus in Bayesian and Dominant Strategy Auctions," Econometrica, Econometric Society, vol. 56(6), pages 1247-57, November.
    10. Peter Cramton, 1997. "The FCC Spectrum Auctions: An Early Assessment," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(3), pages 431-495, 09.
    11. Jean-Jaques Laffont & Jean Tirole, 1985. "Auctioning Incentive Contracts," Working papers 403, Massachusetts Institute of Technology (MIT), Department of Economics.
    12. McAfee, R Preston & Reny, Philip J, 1992. "Correlated Information and Mechanism Design," Econometrica, Econometric Society, vol. 60(2), pages 395-421, March.
    13. Peter Cramton, 2009. "How Best to Auction Natural Resources," Papers of Peter Cramton 09anr, University of Maryland, Department of Economics - Peter Cramton, revised 2009.
    14. Cremer, Jacques & McLean, Richard P, 1985. "Optimal Selling Strategies under Uncertainty for a Discriminating Monopolist When Demands Are Interdependent," Econometrica, Econometric Society, vol. 53(2), pages 345-61, March.
    15. Milgrom, Paul R & Weber, Robert J, 1982. "A Theory of Auctions and Competitive Bidding," Econometrica, Econometric Society, vol. 50(5), pages 1089-1122, September.
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