Urban Land Auctions with Incentive Contracts

This paper formulates a game theoretical model of urban land auctions with incentive contracts. The auction is organized by the government seeking to exercise control over house prices. The government announces a formula in terms of bids and house prices to decide the winner of the auction. All participants are required to include their sales price of the constructed houses when they submit their bids. The winner is bound by an obligation to sell the houses at the price he proposed. The firm types, opportunity costs of investment, are private information to all firms, and utility functions of participants take general forms. This paper shows that the Bayesian Nash equilibrium firm bidding strategies are monotonic in firm types.