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When and how to dismantle nuclear weapons

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  • Lu, Jingfeng

Abstract

This paper first derives revenue-maximizing auctions with identity-specific externalities among all players (seller and buyers). Our main findings are as follows. Firstly, a modified second-price sealed-bid auction with appropriate entry fees and reserve price is revenue-maximizing. Secondly, seller may physically destroy the auctioned item if the item is unsold or use destroying the item as nonparticipation threat. Thirdly, the revenue-maximizing auction induces full participation of buyers. Fourthly, each losing buyer's payment includes an externality-correcting component that equals the allocative externality to him. These components eliminate the impact of externalities on strategic bidding behavior. The paper further studies revenue-maximizing auctions with financial externalities. One-to-one correspondences between revenue-maximizing auctions for settings with and without financial externalities are established through incorporating externality-correcting payments. This result provides a general method for designing revenue-maximizing auctions in different settings of financial externalities, since revenue-maximizing auctions can be obtained through transforming the revenue-maximizing auctions for the regular settings without externalities.

Suggested Citation

  • Lu, Jingfeng, 2006. "When and how to dismantle nuclear weapons," MPRA Paper 935, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:935
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    File URL: https://mpra.ub.uni-muenchen.de/935/1/MPRA_paper_935.pdf
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    References listed on IDEAS

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    1. Roger B. Myerson, 1981. "Optimal Auction Design," Mathematics of Operations Research, INFORMS, vol. 6(1), pages 58-73, February.
    2. Isabelle Brocas, 2003. "Endogenous entry in auctions with negative externalities," Theory and Decision, Springer, vol. 54(2), pages 125-149, March.
    3. Emiel Maasland & Sander Onderstal, 2007. "Auctions with Financial Externalities," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 32(3), pages 551-574, September.
    4. Jehiel, Philippe & Moldovanu, Benny & Stacchetti, Ennio, 1996. "How (Not) to Sell Nuclear Weapons," American Economic Review, American Economic Association, vol. 86(4), pages 814-829, September.
    5. Maasland, E. & Onderstal, A.M., 2002. "Optimal Auctions with Financial Externalities," Other publications TiSEM f69f3ee8-a267-4e09-82b1-9, Tilburg University, School of Economics and Management.
    6. Jacob K. Goeree & Emiel Maasland & Sander Onderstal & John L. Turner, 2005. "How (Not) to Raise Money," Journal of Political Economy, University of Chicago Press, vol. 113(4), pages 897-926, August.
    7. Gopal Das Varma, 2002. "Standard Auctions with Identity-Dependent Externalities," RAND Journal of Economics, The RAND Corporation, vol. 33(4), pages 689-708, Winter.
    8. Stegeman, Mark, 1996. "Participation Costs and Efficient Auctions," Journal of Economic Theory, Elsevier, vol. 71(1), pages 228-259, October.
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    Cited by:

    1. Brocas, Isabelle, 2013. "Selling an asset to a competitor," European Economic Review, Elsevier, vol. 57(C), pages 39-62.
    2. Luke A. Boosey & Christopher Brown, 2021. "Contests with Network Externalities: Theory & Evidence," Working Papers wp2021_07_02, Department of Economics, Florida State University.

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    More about this item

    Keywords

    Auctions design; Endogenous participation; Externality;
    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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