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A Subsidized Vickrey Auction for Cost Sharing


  • Jesse A. Schwartz

    () (Department of Economics, Kennesaw State University)

  • Quan Wen

    () (Department of Economics, Vanderbilt University)


We introduce a subsidized Vickrey auction for cost sharing problems. Although the average, marginal, and serial cost sharing mechanisms are budget-balanced, they are not allocatively efficient and they do not induce players to truthfully reveal their values as a dominant strategy. The conventional Vickrey auction, on the other hand, is allocatively efficient and does induce truthful bidding as a dominant strategy, but also generates an overpayment. This paper modifies the conventional Vickrey auction so that some of the overpayment is used to subsidize additional production without upsetting the players' incentives to bid truthfully. Although this subsidized Vickrey auction is not allocatively efficient, it always Pareto dominates the conventional Vickrey auction and sometimes dominates other existing cost sharing mechanisms.

Suggested Citation

  • Jesse A. Schwartz & Quan Wen, 2007. "A Subsidized Vickrey Auction for Cost Sharing," Vanderbilt University Department of Economics Working Papers 0705, Vanderbilt University Department of Economics.
  • Handle: RePEc:van:wpaper:0705

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    References listed on IDEAS

    1. Hervé Moulin & Scott Shenker, 2001. "Strategyproof sharing of submodular costs:budget balance versus efficiency," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 18(3), pages 511-533.
    2. Yan Chen & Laura Razzolini & Theodore Turocy, 2007. "Congestion allocation for distributed networks: an experimental study," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 33(1), pages 121-143, October.
    3. Krishna, Vijay, 2009. "Auction Theory," Elsevier Monographs, Elsevier, edition 2, number 9780123745071.
    4. Ausubel Lawrence M & Milgrom Paul R, 2002. "Ascending Auctions with Package Bidding," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 1(1), pages 1-44, August.
    5. Moulin Herve & Shenker Scott, 1994. "Average Cost Pricing versus Serial Cost Sharing: An Axiomatic Comparison," Journal of Economic Theory, Elsevier, vol. 64(1), pages 178-201, October.
    6. Laura Razzolini & Michael Reksulak & Robert Dorsey, 2007. "An Experimental Evaluation of the Serial Cost Sharing Rule," Theory and Decision, Springer, vol. 63(3), pages 283-314, November.
    7. Milgrom,Paul, 2004. "Putting Auction Theory to Work," Cambridge Books, Cambridge University Press, number 9780521536721, March.
    8. McAfee, R. Preston, 1992. "A dominant strategy double auction," Journal of Economic Theory, Elsevier, vol. 56(2), pages 434-450, April.
    9. Friedman, Eric & Moulin, Herve, 1999. "Three Methods to Share Joint Costs or Surplus," Journal of Economic Theory, Elsevier, vol. 87(2), pages 275-312, August.
    10. William Vickrey, 1961. "Counterspeculation, Auctions, And Competitive Sealed Tenders," Journal of Finance, American Finance Association, vol. 16(1), pages 8-37, March.
    11. Chen, Yan, 2003. "An experimental study of serial and average cost pricing mechanisms," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 2305-2335, September.
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    More about this item


    Cost sharing; dominant strategy implementation; Vickrey auction; subsidized Vickrey auction;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods

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