An Optimal Auction with Moral Hazard
Romans Pancs*, Arina Nikandrova
Last modified: 2014-04-05
Abstract
We consider a single-item, independent private value auction environment with two bidders: the leader, who knows his valuation, and the follower, who exerts an effort that affects the probability distribution of his valuation, which he then learns. We provide sufficient conditions under which a revenue-maximizing auction solicits bids sequentially and partially discloses the leader's bid to the follower, thereby influencing the follower's effort. This disclosure rule, which is novel, prescribes sometimes revealing only a pair to which the leader's bid belongs and sometimes (not always) revealing the bid itself. Thus, the interval-pooling pattern of Crawford, Vincent P. and Sobel (1982) is suboptimal. The induced effort distortion relative to the first-best is discussed.