The optimal mechanism for selling to a budget-constrained buyer

This paper finds an optimal mechanism for selling a good to a buyer who may be budget-constrained. We consider a seller with one unit of a good facing a buyer with ic quasilinear utility function. If the buyer does not face a binding budget constraint, textbook monopoly pricing is optimal. By contrast, the possibility of a binding budget constraint can make it optimal for the seller to use nonlinear pricing, to commit to a declining price sequence, to require the buyer to disclose his budget. or to other financing. Journal of Economic Literature Classification numbers: C70, D42, D45, D89, L12. (C) 2000 Academic Press.