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Optimal equity auctions with heterogeneous bidders

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  • Liu, Tingjun

Abstract

I analyze the effects of heterogeneity in terms of bidders' valuation distributions and standalone values in equity auctions—auctions in which bidders offer equities rather than cash. Heterogeneity misaligns equity bids' face values, monetary values, and bidder types, making the seller's revenues sensitive to the auction design. Given heterogeneity, I identify the mechanism that maximizes the expected revenue among all incentive-compatible mechanisms of equity auctions. I show how different sources of heterogeneity alter the optimal design, revenues, and allocational efficiency. Unlike optimal cash auctions (Myerson, 1981), where bidders' standalone values are irrelevant, the allocation of optimal equity auctions favors bidders with lower standalone values, because the seller can extract a larger proportion of their rents. By contrast, when bidders differ only in valuation distributions, optimal equity auctions feature more efficient allocations than optimal cash auctions.

Suggested Citation

  • Liu, Tingjun, 2016. "Optimal equity auctions with heterogeneous bidders," Journal of Economic Theory, Elsevier, vol. 166(C), pages 94-123.
    • Handle: RePEc:eee:jetheo:v:166:y:2016:i:c:p:94-123
    DOI: 10.1016/j.jet.2016.08.005
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    Cited by:

    1. Takeharu Sogo & Dan Bernhardt & Tingjun Liu, 2016. "Endogenous Entry to Security-Bid Auctions," American Economic Review, American Economic Association, vol. 106(11), pages 3577-3589, November.
    2. Tingjun Liu & Dan Bernhardt, 2021. "Rent Extraction with Securities Plus Cash," Journal of Finance, American Finance Association, vol. 76(4), pages 1869-1912, August.
    3. Wong, Tak-Yuen & Wong, Ho-Po Crystal, 2023. "Securities auctions with pre-project information management," International Journal of Industrial Organization, Elsevier, vol. 88(C).
    4. Bernhardt, Dan & Liu, Tingjun & Sogo, Takeharu, 2020. "Costly auction entry, royalty payments, and the optimality of asymmetric designs," Journal of Economic Theory, Elsevier, vol. 188(C).
    5. Wang, Dazhong & Xu, Xinyi, 2022. "Optimal equity auction with interdependent valuations," Journal of Mathematical Economics, Elsevier, vol. 100(C).
    6. Pan, Lijun & Wang, Dazhong, 2021. "The broker-optimal bilateral trading mechanisms with linear contracts," Economics Letters, Elsevier, vol. 208(C).
    7. Andrés Fioriti & Allan Hernandez-Chanto, 2022. "Leveling the Playing Field for Risk-Averse Agents in Security-Bid Auctions," Management Science, INFORMS, vol. 68(7), pages 5441-5463, July.
    8. Hernandez-Chanto, Allan & Fioriti, Andres, 2019. "Bidding securities in projects with negative externalities," European Economic Review, Elsevier, vol. 118(C), pages 14-36.
    9. Sogo, Takeharu, 2017. "Effects of seller’s information disclosure in equity auctions requiring post-auction investment," International Journal of Industrial Organization, Elsevier, vol. 55(C), pages 166-181.
    10. Sun, Wuqin & Wang, Dazhong & Zhang, Yue, 2018. "Optimal profit sharing mechanisms with type-dependent outside options," Journal of Mathematical Economics, Elsevier, vol. 75(C), pages 57-66.
    11. Jyh-Bang Jou & Charlene Tan Lee, 2023. "Design of the contingent royalty rate as related to the type of investment," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 9(1), pages 1-25, December.
    12. Xun Chen & Shanmin Li & Dazhong Wang, 2022. "Optimal revenue-sharing mechanisms with seller commitment to ex-post effort," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 58(1), pages 141-159, January.
    13. Liu, Tingjun & Bernhardt, Dan, 2019. "Optimal equity auctions with two-dimensional types," Journal of Economic Theory, Elsevier, vol. 184(C).
    14. Vladimirov, Vladimir, 2021. "Financing Skilled Labor," CEPR Discussion Papers 15751, C.E.P.R. Discussion Papers.

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    More about this item

    Keywords

    Auctions; Bidder heterogeneity; Equity bids; Mechanism design;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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