Theoretical Economics, Volume 11, Number 1 ( 2016)

Theoretical Economics 11 (2016), 133–155

Optimally constraining a bidder using a simple budget

Justin Burkett


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.

Keywords: Budget constraints, auctions, mechanism design

JEL classification: D44, D47, D82, D86

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