Past exam of the mathematics course of the University of Cambridge 2015 iii Paper 42 1 Solution Created 2026-10-03 Updated 2026-10-06
Use the usual independent private values model, quasilinear utility, and voluntary participation with zero outside utility. These assumptions matter: without individual rationality, arbitrary type-independent entry charges make revenue unbounded, and correlated types cannot in general be described by their marginal priors alone.
The revelation principle lets us optimize over direct revelation mechanisms satisfying Bayesian incentive compatibility. Write for the common project allocation, for player 's interim allocation, and for its interim payment. The interim payment identity givesSince interim individual rationality requires , the virtual-surplus revenue identity bounds expected revenue byThe best feasible common allocation at each valuation profile therefore provides the project when total virtual surplus is nonnegative:Because each regular prior has a nondecreasing virtual valuation, this allocation is a nondecreasing function of each player's report. Hold fixed and charge the critical-value paymentThis is the winning threshold when it lies in the support, the lowest allowed value if every type wins, and zero if the player loses. A truthful winner never pays more than its value; a losing type cannot profit by crossing the threshold. Thus the mechanism has dominant-strategy incentive compatibility and ex post individual rationality, with zero utility at every lowest type. It attains the revenue bound, proving optimality even among mechanisms requiring only Bayesian incentive compatibility. At a zero-virtual-surplus tie, choose any fixed rule that preserves monotonicity.
For independent uniform distributions on , the virtual valuations are . The revenue-optimal public-project auction becomesWhen it is provided, player paysotherwise every payment is zero. If the displayed threshold exceeds one, player cannot induce provision within its allowed support; if it is negative, provision is independent of its own report and its payment is zero. For , this specializes to a reserve value and payment of .
Revenue-optimal public-project auction 2026-10-06
In a public-project single-parameter mechanism, all players receive the same binary allocation. For independent regular priors and voluntary participation with zero outside utility, maximizing virtual surplus means providing the project exactly when . The allocation is monotone in each value, so critical-value payments implement it with dominant-strategy incentive compatibility and ex post individual rationality. For independent uniform values on , the condition is , with winning payment .