Optimal auction design with contingent payments and costly verification

Ian Ball () and Teemu Pekkarinen ()
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Ian Ball: Department of Economics, MIT
Teemu Pekkarinen: Department of Economics, University of Vaasa

Theoretical Economics, Forthcoming

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 from the asset 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 an auction that maximizes the principal's revenue, net of auditing costs. The winning bidder is charged linear royalties up to a cap, beyond which there is no auditing. A higher bidder pays more in cash upfront and faces a lower royalty cap.

Keywords: Contingent payments; costly verification; sequential screening; royalties; mechanism design; auctions (search for similar items in EconPapers)
JEL-codes: D44 D82 D86 (search for similar items in EconPapers)
Date: 2026-04-27
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