Auctions with a profit sharing contract

Vineet Abhishek, Bruce Hajek, Steven R. Williams

Research output: Contribution to journalArticlepeer-review


An auction is used to sell a resource that is then developed by the winning buyer to generate a profit. Two forms of payment are considered: (i) charging the winning buyer a one-time payment; (ii) charging an initial payment followed by a profit sharing contract (PSC) that divides the realized profit between the seller and the winning buyer. A symmetric interdependent values model with a risk neutral seller and either risk averse or risk neutral buyers is considered, along with the second price and English auctions. The properties of those PSCs in which either positive profits or both profits and losses are split according to a fixed fraction are studied. The seller's expected revenue is shown to be larger in a class of general PSCs with nontrivial profit sharing than in an auction with only a one-time payment.

Original languageEnglish (US)
Pages (from-to)247-270
Number of pages24
JournalGames and Economic Behavior
Issue number1
StatePublished - Jan 2013


  • Auction
  • Principal-agent relationship
  • Profit sharing contracts
  • Selling a resource

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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