High Bids and Broke Winners
AbstractThis 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 Ã¯Â¾âhigh bids and broke winnersÃ¯Â¾â 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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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Theory.
Volume (Year): 100 (2001)
Issue (Month): 1 (September)
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Web page: http://www.elsevier.com/locate/inca/622869
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- Che, Yeon-Koo & Gale, Ian, 2000. "The Optimal Mechanism for Selling to a Budget-Constrained Buyer," Journal of Economic Theory, Elsevier, vol. 92(2), pages 198-233, June.
- Che, Yeon-Koo & Gale, Ian, 1996. "Expected revenue of all-pay auctions and first-price sealed-bid auctions with budget constraints," Economics Letters, Elsevier, vol. 50(3), pages 373-379, March.
- Che, Yeon-Koo & Gale, Ian, 1998. "Standard Auctions with Financially Constrained Bidders," Review of Economic Studies, Wiley Blackwell, vol. 65(1), pages 1-21, January.
- 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 347-61, March.
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