The paper suggests that a portion of moral hazard is due to income transfers and that this portion of moral hazard should be excluded from the welfare loss Calculations. Only the portion of moral hazard that is due to the pure price effect has conventional welfare loss implications.

If the bidders in an auction have financial constraints, how should the seller design the auction to maximize his profit? An observed practice is that the seller offers a loan, or interest subsidy, to the highest bidder. The work by Che and Gale [3] has given a partial answer for second-price...