This seminar is offered jointly with the Economics Theory Group.

Auction theory revolves around the design and analysis of auctions when a seller with goods for sale is confronted with buyers whose willingness to pay he knows little about. A standard assumption is to conflate a buyer's willingness to pay with her ability to pay- an
unpalatable assumption in a variety of situations. For instance, in government auctions (privatization, license sales etc.), the sale price may well exceed a buyers' liquid assets, and she may need to rely on an imperfect (i.e. costly) capital market to raise funds. These frictions limit her ability to pay, but not her valuation (how much she would pay if she had the money). For a seller, budget constraints mean that low budget bidders cannot put competitive pressure on high budget bidders. For this reason it has been suggested the seller should subsidize some bidders to foster competition. We investigate this question by examining the revenue maximizing bayesian incentive compatible mechanism for the sale of a single good to buyers who have budget constraints. Both the valuation and the budget of the buyer are assumed to be private information. This paper is based on joint work with Mallesh Pai.

Paper location: http://www.kellogg.northwestern.edu/faculty/Vohra/ftp/LR3.pdf

Background paper:

Standard Auctions with Financially Constrained Bidders
Yeon-Koo Che & Ian Gale

in the Review of Economic Studies, vol 65, issue 1, pg. 1-21