Optimal Auction Design with Contingent Payments and Costly Verification (2403.19945v4)

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.