Optimal Auction Design with Royalty Payments

Abstract

A royalty system on mineral auctions is common practice in many countries. This selling procedure for state-owned minerals, such as gas or oil, is usually implemented by a second-price auction or an English auction such that the government collects an additional payment from the winner of the auction based on its revenue on the minerals. We show that the optimal selling mechanism with costly verification can be implemented, indeed, by a second-price auction with a reserve price and a royalty payment for the winner.