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Bidding with Securities: Auctions and Security Design

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Author Info
Andrzej Skrzypacz
Peter M. DeMarzo
Ilan Kremer

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Abstract

We study security-bid auctions in which bidders compete for an asset by bidding with securities. That is, they offer payments that are contingent on the realized value of the asset being sold. Standard auction mechanisms (such as first-price and second-price auctions) are not well defined unless the set of securities is restricted to an ordered set. For example, the seller may require a bidto be exclusively an equity share, or exclusively a debt payment. Given such a restriction, we first ask whether revenue equivalence holds, i.e. whether expected revenues depend upon the auction format. We show that this principle holds if the set of permissible securities is convex. Otherwise, this need not be true. For example, when bidders offer standard debt securities, a second-price auction is superior. On the other hand, if bidders compete on the conversion ratio of convertible debt, a first-price auction yields higher revenues. We then consider the joint problem of choosing both the security and auction design. We show that the optimal mechanism yielding the highest possible expected revenues for the seller is a first-price auction with levered equity. On the other hand, a first-price auction with debt contracts is the worst possible mechanism for the seller. Finally, we examine the case in which the seller cannot commit to a formal mechanism. Instead, he chooses the most attractive bid ex post, based on his beliefs. We show that this procedure yields the lowest possible revenues across all mechanisms

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Publisher Info
Paper provided by Econometric Society in its series Econometric Society 2004 North American Winter Meetings with number 637.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nawm04:637

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Related research
Keywords: auctions security design revenue equivalence

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Find related papers by JEL classification:
D44 - Microeconomics - - Market Structure and Pricing - - - Auctions

References listed on IDEAS
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  10. Nachman, David C & Noe, Thomas H, 1994. "Optimal Design of Securities under Asymmetric Information," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 7(1), pages 1-44. [Downloadable!] (restricted)
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  12. Hansen, Robert G, 1985. "Auctions with Contingent Payments," American Economic Review, American Economic Association, vol. 75(4), pages 862-65, September. [Downloadable!] (restricted)
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  17. Cho, In-Koo & Kreps, David M, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 179-221, May. [Downloadable!] (restricted)
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  19. 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. [Downloadable!] (restricted)
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  23. Maskin, Eric S & Riley, John G, 1984. "Optimal Auctions with Risk Averse Buyers," Econometrica, Econometric Society, vol. 52(6), pages 1473-1518, November. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Inderst, Roman & Mueller, Holger M, 2005. "Informed Lending and Security Design," CEPR Discussion Papers 5185, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. Yeon-Koo Che & Kathryn E. Spier, 2008. "Strategic Judgment Proofing," NBER Working Papers 14183, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Sandro Brusco & Giuseppe Lopomo & S Viswanathan, 2004. "Merger Mechanisms," Levine's Bibliography 122247000000000379, UCLA Department of Economics. [Downloadable!]
    Other versions:
  4. Hege, Ulrich & Lovo, Stefano & Slovin, Myron & Sushka, Marie, 2006. "Equity and cash in intercorporate asset sales : theory and evidence," Les Cahiers de Recherche 859, Groupe HEC. [Downloadable!]
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