Design of the contingent royalty rate as related to the type of investment

Abstract This study investigates the design of royalty rate in a first-price auction across three types investments: incremental and lumpy with or without an exogenously given intensity. A bidder’s investment cost comprises private information. This, together stochastic evolution price output generated from auctioned project, precludes seller setting exact dates winner. However, can set to equate winner’s payment information rent so that winner acts as if maximize seller’s revenue. We derive two main conclusions. First, compared case which is intensity, lower on because she collect additional payments winner, who has option later expand capacity. Second, impact uncertainty optimal for investments exhibits different patterns. When either greater reduces rate. variable raises Our results imply auctioneers may charge differential rates investments.