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Auctions with a profit sharing contract

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  • Abhishek, Vineet
  • Hajek, Bruce
  • Williams, Steven R.

Abstract

An auction is used to sell a resource that is then developed by the winning buyer to generate a profit. Two forms of payment are considered: (i) charging the winning buyer a one-time payment; (ii) charging an initial payment followed by a profit sharing contract (PSC) that divides the realized profit between the seller and the winning buyer. A symmetric interdependent values model with a risk neutral seller and either risk averse or risk neutral buyers is considered, along with the second price and English auctions. The properties of those PSCs in which either positive profits or both profits and losses are split according to a fixed fraction are studied. The sellerʼs expected revenue is shown to be larger in a class of general PSCs with nontrivial profit sharing than in an auction with only a one-time payment.

Suggested Citation

  • Abhishek, Vineet & Hajek, Bruce & Williams, Steven R., 2013. "Auctions with a profit sharing contract," Games and Economic Behavior, Elsevier, vol. 77(1), pages 247-270.
    • Handle: RePEc:eee:gamebe:v:77:y:2013:i:1:p:247-270
    DOI: 10.1016/j.geb.2012.10.007
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    References listed on IDEAS

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    Cited by:

    1. Wang, Dazhong & Xu, Xinyi & Zeng, Xianjie, 2023. "Comparisons of standard royalty auctions with seller post-auction effort," Journal of Mathematical Economics, Elsevier, vol. 107(C).
    2. Wang, Dazhong & Xu, Xinyi & Zeng, Xianjie, 2022. "Bid signaling in first-price royalty auction," Economics Letters, Elsevier, vol. 216(C).
    3. Hernandez-Chanto, Allan & Fioriti, Andres, 2019. "Bidding securities in projects with negative externalities," European Economic Review, Elsevier, vol. 118(C), pages 14-36.
    4. Yanhua Du & Jun Fang & Yongjian Ke & Simon P Philbin & Jingxiao Zhang, 2019. "Developing a Revenue Sharing Method for an Operational Transfer-Operate-Transfer Project," Sustainability, MDPI, vol. 11(22), pages 1-19, November.
    5. Wong, Tak-Yuen & Wong, Ho-Po Crystal, 2023. "Securities auctions with pre-project information management," International Journal of Industrial Organization, Elsevier, vol. 88(C).
    6. Abhishek, Vineet & Hajek, Bruce & Williams, Steven R., 2015. "On bidding with securities: Risk aversion and positive dependence," Games and Economic Behavior, Elsevier, vol. 90(C), pages 66-80.
    7. Pandey, Ashish & Guhathakurta, Kousik, 2023. "Use of Contingent Payment Mechanism in Nonperforming Loan Auctions," Finance Research Letters, Elsevier, vol. 52(C).
    8. Jifeng Cao & Cheng Ma, 2022. "Procurement Strategies and Auction Mechanism for Heterogeneous Service Providers in a Service Supply Chain," Sustainability, MDPI, vol. 14(15), pages 1-36, July.
    9. Sun, Wuqin & Wang, Dazhong & Zhang, Yue, 2018. "Optimal profit sharing mechanisms with type-dependent outside options," Journal of Mathematical Economics, Elsevier, vol. 75(C), pages 57-66.
    10. Andrés Fioriti & Allan Hernandez-Chanto, 2022. "Leveling the Playing Field for Risk-Averse Agents in Security-Bid Auctions," Management Science, INFORMS, vol. 68(7), pages 5441-5463, July.

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    More about this item

    Keywords

    Selling a resource; Auction; Profit sharing contracts; Principal–agent relationship;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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