Dynamic Mechanism Design with Costly Participation

We introduce costly participation into a dynamic mechanism design model. Depending on the assumptions on the timing of participation timing the revelation principle may fail to hold. Dynamic mechanisms generally allow for sequential coordination of participation decisions and may therefore improve upon simultaneous revelation mechanisms. This failure increases the di¢ culty of …nding optimal mechanisms. We apply this idea to an auction setting and discuss how the optimal auction depends on the speci…cation of the participation timing. In particular we …nd that an open out-cry auction that allows potential bidders to observe others'bids is revenue-optimal in a large class of auctions.