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Optimal Auction Design with Flexible Royalty Payments

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  • Ian Ball
  • Teemu Pekkarinen

Abstract

We study the design of an auction for a license. Each agent has a signal about his future profit from winning the license. If the license is allocated, the winner can be charged a flexible royalty based on the profits he reports. The principal can audit the winner, at a cost, and charge limited penalties. We solve for the auction that maximizes revenue, net auditing costs. In this auction, the winner pays linear royalties up to a cap, beyond which there is no auditing. A more optimistic bidder pays more upfront in exchange for a lower royalty cap.

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  • Ian Ball & Teemu Pekkarinen, 2024. "Optimal Auction Design with Flexible Royalty Payments," Papers 2403.19945, arXiv.org.
    • 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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