“Optimal Mechanism with Budget Constraint Bidders”

Sergei Severinov, University of British Columbia

The paper deals with the mechanism design for selling to buyers who have commonly known budget constraints. With unequal budgets, our problem is that of asymmetric optimal mechanism design. We derive and characterize the optimal mechanism. It belongs to one of two classes. When the budget differences are small, the mechanism discriminates only between high-valuation buyers for whom the budget constraint is binding. All low valuations buyers are treated symmetrically despite budget differences. When budget differences are sufficiently large, the optimal mechanism discriminates in favor of buyers with small budgets when the valuations are low, and in favor of buyers with larger budgets when the valuations are high.