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Optimal Auction Design with Contingent Payments and Costly Verification

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  • Ian Ball
  • Teemu Pekkarinen

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

  • Ian Ball & Teemu Pekkarinen, 2024. "Optimal Auction Design with Contingent Payments and Costly Verification," Papers 2403.19945, arXiv.org, revised Mar 2026.
    • Handle: RePEc:arx:papers:2403.19945
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    References listed on IDEAS

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    1. Péter Eső & Balázs Szentes, 2007. "Optimal Information Disclosure in Auctions and the Handicap Auction," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 74(3), pages 705-731.
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    Cited by:

    1. Deniz Kattwinkel & Justus Preusser, 2025. "The Division of Surplus and the Burden of Proof," Papers 2501.14686, arXiv.org, revised Oct 2025.

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