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Credit contracting and bidding under wealth constraints

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  • Charles E. Hyde

    ()
    (Department of Economics, University of Melbourne, Parkville, 3010, AUSTRALIAand Deloitte & Touche, 225 George St, Sydney, 1217, AUSTRALIA)

  • James A. Vercammen

    (Faculties of Agricultural Sciences and Commerce & Business Administration, UBC, Vancouver,V6T 1Z2, CANADA)

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    Abstract

    We 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 Info

    Article provided by Springer in its journal Economic Theory.

    Volume (Year): 20 (2002)
    Issue (Month): 4 ()
    Pages: 703-732

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    Handle: RePEc:spr:joecth:v:20:y:2002:i:4:p:703-732

    Note: Received: January 22, 2001; revised version: August 28, 2001
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    Related research

    Keywords: Financial constraints; Auctions; Information asymmetry; Loan contracts; Credit markets.;

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