How (Not) to Sell Nuclear Weapons.

The authors consider situations where a sale affects the ensuing interaction between potential buyers. These situations are modeled by assuming that an agent who does not acquire the object for sale incurs an identity-dependent externality. The authors construct a revenue-maximizing auction for the seller. They observe that outside options and participation constraints are endogenous; the seller extracts surplus also from agents who do not obtain the auctioned object; and the seller is better-off by not selling at all (while obtaining some payments) if externalities are much larger than valuations. Copyright 1996 by American Economic Association.