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Bidding into the Red: A Model of Post-Auction Bankruptcy

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SIMON BOARD

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Abstract

This paper investigates auctions where bidders have limited liability. First, we analyze bidding behavior under different auction formats, showing that the second-price auction induces higher prices, higher bankruptcy rates, and lower utilities than the first-price auction. Second, we show that the cost of bankruptcy critically affects the seller's preference over the choice of auction. If bankruptcy is very costly, the seller prefers the first-price auction over the second-price auction. Alternatively, if the bankrupt assets are resold among the losers of the initial auction, the seller prefers the second-price auction. Copyright 2007 by The American Finance Association.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1540-6261.2007.01290.x
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Publisher Info
Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 62 (2007)
Issue (Month): 6 (December)
Pages: 2695-2723
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Handle: RePEc:bla:jfinan:v:62:y:2007:i:6:p:2695-2723

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  1. Jose E. Quintero Jaramillo, 2004. "Liquidity Constraints And Credit Subsidies In Auctions," Business Economics Working Papers wb040604, Universidad Carlos III, Departamento de Economía de la Empresa. [Downloadable!]
  2. Marco Pagnozzi, 2004. "Bidding to Lose? Auctions with Resale," CSEF Working Papers 116, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy. [Downloadable!]
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This page was last updated on 2009-11-12.

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