The Second-Price Auction Solves King Solomon's Dilemma
9 Pages Posted: 28 Aug 2006
Date Written: August 2006
Consider the problem of allocating k identical, indivisible objects among n agents, where k is less than n. The planner's objective is to give the objects to the top k valuation agents at zero costs to the planner and the agents. Each agent knows the identity of those k agents, as well as her own valuation of the object. Modify the (k+1)st-price sealed-bid auction by introducing a small participation fee and the option (not) to participate in it. This strikingly simple mechanism (modified auction) implements the desired outcome in iteratively weakly undominated strategies.
Keywords: Solomon's problem, implementation, incomplete information, voluntary participation, iterative elimination of weakly dominated strategies, Olszewski's mechanism, entry fees
JEL Classification: C72, D61, D71, D82
Suggested Citation: Suggested Citation