On the non-optimality of auctions-The case of profit sharing

In this paper we have shown that a PSA in a competitive environment can result in a non-optimal allocation. A sufficient condition for the optimality of the PSA is that the owner gets an income, in a form of a lump sum payment only, and the operator collects all the variable profits which result from his activity. This conclusion suggests that an agent should act as an independent entity and obtain his full marginal product. An alternative suggestion is that, the division of ownership take the form of a FPSA. In other words, the partnership between the owner and the operator will be in a form of stock-ownership.