The problem of dynamic spectrum allocation for participatory cognitive radio (CR) networks is modeled using an auction-based mechanism, where the fusion center (FC) acts as an auctioneer and allocates spectrum to CRs without complete knowledge regarding spectrum availability. We also consider the cost of collisions with the primary user (PU) and assign this cost to the FC, making it completely responsible for its allocation decision. With the help of CRs participating in the network, the FC makes a global inference on the availability of the spectrum followed by spectrum allocation. The goal of this paper is to investigate the design of an optimal auction-based framework for participatory CR networks, and to find the conditions under which a CR actively participates in the optimal auction (or, collaborative spectrum sensing). We also identify a scenario in the optimal auction design where the FC pays to the participating CRs, in order to improve the sensing performance, while simultaneously maximizing its revenue.