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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 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 a dynamic mechanism that maximizes revenue, net auditing costs. The winning bidder is charged linear royalties up to a cap. A higher bidder pays more in cash and faces a lower royalty cap.

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  • Ian Ball & Teemu Pekkarinen, 2024. "Optimal Auction Design with Contingent Payments and Costly Verification," Papers 2403.19945, arXiv.org, revised Sep 2024.
    • 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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