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When and how to dismantle nuclear weapons

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Author Info
Lu, Jingfeng

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Abstract

This paper first derives revenue-maximizing auctions with identity-specific externalities among all players (seller and buyers). Our main findings are as follows. Firstly, a modified second-price sealed-bid auction with appropriate entry fees and reserve price is revenue-maximizing. Secondly, seller may physically destroy the auctioned item if the item is unsold or use destroying the item as nonparticipation threat. Thirdly, the revenue-maximizing auction induces full participation of buyers. Fourthly, each losing buyer's payment includes an externality-correcting component that equals the allocative externality to him. These components eliminate the impact of externalities on strategic bidding behavior. The paper further studies revenue-maximizing auctions with financial externalities. One-to-one correspondences between revenue-maximizing auctions for settings with and without financial externalities are established through incorporating externality-correcting payments. This result provides a general method for designing revenue-maximizing auctions in different settings of financial externalities, since revenue-maximizing auctions can be obtained through transforming the revenue-maximizing auctions for the regular settings without externalities.

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Publisher Info
Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 935.

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Date of creation: Dec 2006
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Handle: RePEc:pra:mprapa:935

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Related research
Keywords: Auctions design; Endogenous participation; Externality.;

Find related papers by JEL classification:
D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information

This paper has been announced in the following NEP Reports:

References listed on IDEAS
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  1. Maasland, E. & Onderstal, S., 2002. "Optimal auctions with financial externalities," Discussion Paper 21, Tilburg University, Center for Economic Research. [Downloadable!]
  2. Gopal Das Varma, 2002. "Standard Auctions with Identity-Dependent Externalities," RAND Journal of Economics, The RAND Corporation, vol. 33(4), pages 689-708, Winter.
  3. Emiel Maasland & Sander Onderstal, 2003. "Auctions with Financial Externalities," Working Papers 2003.30, Fondazione Eni Enrico Mattei. [Downloadable!]
    Other versions:
  4. Jehiel, Philippe & Moldovanu, Benny & Stacchetti, Ennio, 1996. "How (Not) to Sell Nuclear Weapons," American Economic Review, American Economic Association, vol. 86(4), pages 814-29, September. [Downloadable!] (restricted)
    Other versions:
  5. Jacob K. Goeree & Emiel Maasland & Sander Onderstal & John L. Turner, 2005. "How (Not) to Raise Money," Journal of Political Economy, University of Chicago Press, vol. 113(4), pages 897-926, August.
  6. Isabelle Brocas, 2003. "Endogenous entry in auctions with negative externalities," Theory and Decision, Springer, vol. 54(2), pages 125-149, March. [Downloadable!] (restricted)
  7. Jehiel, Phillipe & Moldovanu, Benny & Stacchetti, E., 1997. "Multidimensional Mechanism Design for Auctions with Externalities," Sonderforschungsbereich 504 Publications 97-04, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.
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  8. Stegeman, Mark, 1996. "Participation Costs and Efficient Auctions," Journal of Economic Theory, Elsevier, vol. 71(1), pages 228-259, October. [Downloadable!] (restricted)
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