Credit contracting and bidding under wealth constraints
AbstractWe model credit contracting and bidding in a first-price sealed-bid auction when bidder valuation and wealth are private information. An efficient separating equilibrium exists only if the wealth levels of both bidder types are sufficiently different. If not, high-valuation bidders signal by borrowing more and using less of their wealth - this is inefficient as wealth is a cheaper source of funds. An increase in the amount of borrowing required to signal does not necessarily decrease seller expected revenue. In contrast to separating equilibria, high-valuation bidders adopt pure strategy bids in pooling equilibria. Conditions are identified under which the lower bound on winning bids is higher in pooling than separating equilibria.
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Bibliographic InfoArticle provided by Springer in its journal Economic Theory.
Volume (Year): 20 (2002)
Issue (Month): 4 ()
Note: Received: January 22, 2001; revised version: August 28, 2001
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Web page: http://link.springer.de/link/service/journals/00199/index.htm
Find related papers by JEL classification:
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G20 - Financial Economics - - Financial Institutions and Services - - - General
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