Optimal Auction Design with Contingent Payments and Costly Verification

Ian Ball and Teemu Pekkarinen

Papers from arXiv.org

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 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.

Date: 2024-03, Revised 2025-02
New Economics Papers: this item is included in nep-acc, nep-des, nep-gth, nep-ipr, nep-mic and nep-reg
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