Open AccessOptimally constraining a bidder using a simple budget
Author(s) -
Burkett Justin
Publication year - 2016
Publication title -
theoretical economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 4.404
H-Index - 32
eISSN - 1555-7561
pISSN - 1933-6837
DOI - 10.3982/te1745
Subject(s) - budget constraint , simple (philosophy) , revenue , principal (computer security) , common value auction , equivalence (formal languages) , constraint (computer aided design) , microeconomics , vickrey–clarke–groves auction , economics , mathematical economics , computer science , mathematical optimization , auction theory , mathematics , finance , philosophy , epistemology , geometry , discrete mathematics , operating system
I study a principal's optimal choice of constraint for an agent participating in an auction (or auction‐like allocation mechanism). I give necessary and sufficient conditions on the principal's beliefs about the value of the item for a simple budget constraint to be the optimal contract. The results link the observed use of budget constraints to their use in models incorporating budget‐constrained bidders. Other implications of the model are that a general revenue equivalence result applies and that the optimal auction with budget‐constrained bidders has a standard solution analogous to the one for classic models.