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High Bids and Broke Winners

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  • Zheng, Charles Z.

Abstract

This paper analyzes auctions where budget-constrained bidders have options to declare bankruptcy. It predicts a bidding equilibrium that changes is continuously in a borrowing rate available to bidders. When the borrowing rate is above a threshold, high-budget bidders win, and the likelihood of bankruptcy is low. When the borrowing rate is below the threshold, the winner is the most budget-constrained bidder and is most likely to declare bankruptcy. This result explains the ﾓhigh bids and broke winnersﾔ anomaly in the C-Block FCC spectrum auction. Based on its equilibrium analysis, the paper proves that a seller can profit from offering to finance the highest bidder at a below-market interest rate, even with default risk.
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  • Zheng, Charles Z., 2001. "High Bids and Broke Winners," Journal of Economic Theory, Elsevier, vol. 100(1), pages 129-171, September.
    • Handle: RePEc:eee:jetheo:v:100:y:2001:i:1:p:129-171
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    8. Hansen, Robert G & Lott, John R, Jr, 1991. "The Winner's Curse and Public Information in Common Value Auctions: Comment," American Economic Review, American Economic Association, vol. 81(1), pages 347-361, March.
    9. Ian Ayres & Peter Cramton, 1996. "Deficit Reduction Through Diversity: How Affirmative Action at the FCC Increased Auction Competition," Papers of Peter Cramton 96slr, University of Maryland, Department of Economics - Peter Cramton, revised 09 Jun 1998.
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