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arXiv · 2403.19945

Optimal Auction Design with Contingent Payments and Costly Verification

Ian Ball·Teemu Pekkarinen
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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.

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Ian Ball, Teemu Pekkarinen. 2024-03-29. Optimal Auction Design with Contingent Payments and Costly Verification. https://arxiv.org/abs/2403.19945

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