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Optimally constraining a bidder using a simple budget

Author

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  • Burkett, Justin

    (Department of Economics, Wake Forest University)

Abstract

I study a principal's optimal choice of constraint for an agent participating in an auction (or auction-like allocation mechanism). I give necessary and sufficient conditions on the principal's beliefs about the value of the item for a simple budget constraint to be the optimal contract. The results link the observed use of budget constraints to their use in models incorporating budget-constrained bidders. Other implications of the model are that a general revenue equivalence result applies and that the optimal auction with budget-constrained bidders has a standard solution analogous to the one for classic models.

Suggested Citation

  • Burkett, Justin, 2016. "Optimally constraining a bidder using a simple budget," Theoretical Economics, Econometric Society, vol. 11(1), January.
    • Handle: RePEc:the:publsh:1745
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    References listed on IDEAS

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    Cited by:

    1. Amador, Manuel & Bagwell, Kyle, 2020. "Money burning in the theory of delegation," Games and Economic Behavior, Elsevier, vol. 121(C), pages 382-412.
    2. Ghosh, Gagan & Liu, Heng, 2019. "Sequential second-price auctions with private budgets," Games and Economic Behavior, Elsevier, vol. 113(C), pages 611-632.
    3. Bichler, Martin & Paulsen, Per, 2018. "A principal-agent model of bidding firms in multi-unit auctions," Games and Economic Behavior, Elsevier, vol. 111(C), pages 20-40.
    4. Kotowski, Maciej H., 2020. "First-price auctions with budget constraints," Theoretical Economics, Econometric Society, vol. 15(1), January.
    5. Debasis Mishra & Kolagani Paramahamsa, 2018. "Selling to a naive agent with two rationales," Discussion Papers 18-03, Indian Statistical Institute, Delhi.
    6. Lawrence M. Ausubel & Justin E. Burkett & Emel Filiz-Ozbay, 2017. "An experiment on auctions with endogenous budget constraints," Experimental Economics, Springer;Economic Science Association, vol. 20(4), pages 973-1006, December.
    7. Kariv, Shachar & Kotowski, Maciej H. & Leister, C. Matthew, 2018. "Liquidity risk in sequential trading networks," Games and Economic Behavior, Elsevier, vol. 109(C), pages 565-581.
    8. Hummel, Patrick, 2017. "Endogenous budget constraints," Mathematical Social Sciences, Elsevier, vol. 88(C), pages 11-15.
    9. Ghosh, Gagan, 2021. "Simultaneous auctions with budgets: Equilibrium existence and characterization," Games and Economic Behavior, Elsevier, vol. 126(C), pages 75-93.

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    More about this item

    Keywords

    Budget constraints; auctions; mechanism design;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • 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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