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Bidding with Securities: Auctions and Security Design

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Author Info

  • Peter M. DeMarzo
  • Ilan Kremer
  • Andrzej Skrzypacz

Abstract

We study security-bid auctions in which bidders compete for an asset by bidding with securities whose payments are contingent on the asset's realized value. In formal security-bid auctions, the seller restricts the security design to an ordered set and uses a standard auction format (e.g., first- or second-price). In informal settings, bidders offer arbitrary securities and the seller chooses the most attractive bid, based on his beliefs, ex post. We characterize equilibrium and show that steeper securities yield higher revenues, that auction formats can be ranked based on the security design, and that informal auctions lead to the lowest possible revenues.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/0002828054825475
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 95 (2005)
Issue (Month): 4 (September)
Pages: 936-959

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Handle: RePEc:aea:aecrev:v:95:y:2005:i:4:p:936-959

Note: DOI: 10.1257/0002828054825475
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References

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Citations

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Cited by:
  1. Che, Yeon-Koo & Spier, Kathryn, 2006. "Strategic Judgment Proofing," MPRA Paper 6100, University Library of Munich, Germany.
  2. Ulrich Hege & Stefano Lovo & Myron B. Slovin & Marie E. Sushka, 2009. "Equity and Cash in Intercorporate Asset Sales: Theory and Evidence," Review of Financial Studies, Society for Financial Studies, vol. 22(2), pages 681-714, February.
  3. Aktas, Nihat & de Bodt, Eric & Roll, Richard, 2009. "Learning, hubris and corporate serial acquisitions," Journal of Corporate Finance, Elsevier, vol. 15(5), pages 543-561, December.
  4. Pablo F. Beker & Ángel Hernando-Veciana, 2011. "Persistent markups in bidding markets with financial constraints," Economics Working Papers we1133, Universidad Carlos III, Departamento de Economía.
  5. Jun, Byoung Heon & Wolfstetter, Elmar G., 2012. "Security bid auctions for agency contracts," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 371, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  6. Sandro Brusco & Giuseppe Lopomo & S. Viswanathan, 2004. "Merger Mechanisms," Department of Economics Working Papers 04-02, Stony Brook University, Department of Economics.
  7. Cesare Dosi & Michele Moretto, 2012. "Procurement with Unenforceable Contract Time and the Law of Liquidated Damages," Working Papers 2012.45, Fondazione Eni Enrico Mattei.
  8. Inderst, Roman & Mueller, Holger M, 2005. "Informed Lending and Security Design," CEPR Discussion Papers 5185, C.E.P.R. Discussion Papers.
  9. Mike Burkart & Samuel Lee, 2012. "Smart Buyers," FMG Discussion Papers dp696, Financial Markets Group.
  10. Yeon-Koo Che & Jinwoo Kim, 2010. "Bidding with Securities: Comment," American Economic Review, American Economic Association, vol. 100(4), pages 1929-35, September.
  11. Mehmet Ekmekci & Nenad Kos & Rakesh Vohra, 2013. "Just Enough or All: Selling a Firm," Working Papers 470, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  12. Eckbo, B. Espen, 2009. "Bidding strategies and takeover premiums: A review," Journal of Corporate Finance, Elsevier, vol. 15(1), pages 149-178, February.
  13. Vinicius Carrasco & Gustavo Manso, 2006. "Syndication and Robust Collusion in Financial Markets," Textos para discussão 522, Department of Economics PUC-Rio (Brazil).
  14. Aktas, Nihat & de Bodt, Eric & Roll, Richard, 2011. "Serial acquirer bidding: An empirical test of the learning hypothesis," Journal of Corporate Finance, Elsevier, vol. 17(1), pages 18-32, February.

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