Shadow-score auctions for execution incentives

Federico Vaccari

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Abstract: This paper studies optimal auctions in which the allocation creates a moral hazard problem for a third-party executor. The executor chooses effort before the winner is known. In regular independent-private-values environments, the optimal mechanism is a shadow-score auction. Each bidder's virtual value is adjusted by the shadow value of relaxing the executor's incentive constraint using that bidder's allocation state. Unlike standard scoring auctions, the score is derived from a non-bidder's moral hazard constraint rather than from a preference for quality. Reserve formats miss this ranking channel, as they can adjust whether the object is sold, but cannot favor allocation states that are more useful for motivating execution effort. The paper also studies cases in which this scoring representation breaks down and the optimal mechanism becomes a constrained shadow allocation.

Date: 2026-07
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