Auctions are often used to sell assets whose future cash flows require the winner to make postauction investments. When winners’ payments are contingent on these cash flows, auction design can influence both bidding and incentives to exert effort after the auction. We propose a model of contingent payment auctions that links auction design to postauction economic activity. In the context of oil leases in the Permian Basin, we show that moral hazard affects the relative revenue ranking of different auction designs. Among a large class of alternatives, the observed design cannot be changed to increase both revenues and drilling rates.

We study the interaction between tax advantages for municipal bonds and the market structure of auctions for these bonds. We show that this interaction can limit a bidder’s ability to extract information rents and is a crucial determinant of state and local governments’ borrowing costs. Reduced-form estimates show that increasing the tax advantage by 3 pp lowers mean borrowing costs by 9–10%. We estimate a structural auction model to measure markups and to illustrate and quantify how the interaction between tax policy and bidder strategic behaviour determines the impact of tax advantages on municipal borrowing costs. We use the estimated model to evaluate the efficiency of Obama and Trump administration policies that limit the tax advantage for municipal bonds. Because reductions in the tax advantage inflate bidder markups and depress competition, the resulting increase in municipal borrowing costs more than offsets the tax savings to the government. Finally, we use the model to analyse a recent non-tax regulation that affects entry into municipal bond auctions.