An implementation of the general optimal mechanism in Esö and Szentes (2007)

Abstract

In this paper, we provide an implementation of the optimal mechanism of Esö and Szentes (2007) for their general environment without assuming constant marginal utility (in the first-stage type) for the buyers. Our implementation is carried out through a three-stage handicap auction. In stage 1, each buyer, knowing his first-stage type, is required to select a handicap menu by paying a menu fee. A higher menu fee would lead to a more favorable handicap menu, which charges a lower handicap fee for every possible handicap level. In stage 2, each buyer, informed of his second-stage signal, is required to select a handicap by paying a handicap fee specified by his early chosen handicap menu. In stage 3, all buyers compete for the object via a second-price auction with handicaps. The highest bidder wins and pays the sum of his chosen handicap and the second-highest bid.