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Optimal auction design with contingent payments and costly verification

Author

Listed:
  • Ball, Ian

    (Department of Economics, MIT)

  • Pekkarinen, Teemu

    (Department of Economics, University of Vaasa)

Abstract

We study the design of an auction for an income-generating asset such as an intellectual property license. Each bidder has a signal about his future income from acquiring the asset. After the asset is allocated, the winner's income from the asset is realized privately. The principal can audit the winner, at a cost, and then charge a payment contingent on the winner's realized income. We solve for an auction that maximizes the principal's revenue, net of auditing costs. The winning bidder is charged linear royalties up to a cap, beyond which there is no auditing. A higher bidder pays more in cash upfront and faces a lower royalty cap.

Suggested Citation

  • Ball, Ian & Pekkarinen, Teemu, 0. "Optimal auction design with contingent payments and costly verification," Theoretical Economics, Econometric Society.
    • Handle: RePEc:the:publsh:6485
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    Keywords

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    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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