An optimal auction with moral hazard

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 an ex-post efficient 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, is non-monotone and prescribes sometimes revealing only a pair to which the leader’s bid belongs and sometimes revealing the bid itself. The induced effort distortion relative to the first-best is discussed