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Security bid auctions for agency contracts

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Author Info

  • Byoung Heon Jun

    ()
    (Department of Economics, Korea University, Seoul, Republic of Korea)

  • Elmar G. Wolfstetter

    ()
    (Institute of Economic Theory I, Humboldt University at Berlin, Spandauer Str. 1, 10178 Berlin, Germany)

Abstract

A principal uses security bid auctions to award an incentive contract to one among several agents in the presence of hidden action and hidden information. Securities range from cash to equity and call options. ¡°Steeper¡± securities are better surplus extractors that narrow the gap between the two highest valuations, yet reduce effort incentives. In view of this trade-off, a hybrid share auction that includes a (possibly negative) cash reward to the winner, a minimum share, and an option to call a fixed wage contract, tends to outperform all other auctions, although it it is not an optimal mechanism. However, by adding output targets to hybrid share auctions one can (arbitrary closely) implement the optimal mechanism.

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Bibliographic Info

Paper provided by Institute of Economic Research, Korea University in its series Discussion Paper Series with number 1303.

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Date of creation: 2013
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Handle: RePEc:iek:wpaper:1303

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Keywords: Auctions and security design; agency problems; mechanism design;

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References

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  1. Jean-Jaques Laffont & Jean Tirole, 1985. "Auctioning Incentive Contracts," Working papers 403, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Skrzypacz, Andrzej, 2013. "Auctions with contingent payments — An overview," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 666-675.
  3. Shimon Kogan & John Morgan, 2010. "Securities Auctions under Moral Hazard: An Experimental Study," Review of Finance, European Finance Association, vol. 14(3), pages 477-520.
  4. Peter M. DeMarzo & Ilan Kremer & Andrzej Skrzypacz, 2004. "Bidding With Securities: Auctions and Security Design," NBER Working Papers 10891, National Bureau of Economic Research, Inc.
  5. Yeon-Koo Che & Jinwoo Kim, 2010. "Bidding with Securities: Comment," American Economic Review, American Economic Association, vol. 100(4), pages 1929-35, September.
  6. Hansen, Robert G, 1985. "Auctions with Contingent Payments," American Economic Review, American Economic Association, vol. 75(4), pages 862-65, September.
  7. Board, Simon, 2007. "Selling options," Journal of Economic Theory, Elsevier, vol. 136(1), pages 324-340, September.
  8. R. Preston McAfee & John McMillan, 1987. "Competition for Agency Contracts," RAND Journal of Economics, The RAND Corporation, vol. 18(2), pages 296-307, Summer.
  9. Samuelson, William, 1987. "Auctions with Contingent Payments: Comment," American Economic Review, American Economic Association, vol. 77(4), pages 740-45, September.
  10. Cremer, Jacques, 1987. "Auctions with Contingent Payments: Comment," American Economic Review, American Economic Association, vol. 77(4), pages 746, September.
  11. Matthew Rhodes-Kropf & S. Viswanathan, 2005. "Financing Auction Bids," RAND Journal of Economics, The RAND Corporation, vol. 36(4), pages 789-815, Winter.
  12. Ding, Wei & Fan, Cuihong & Wolfstetter, Elmar G., 2010. "Horizontal mergers with synergies: first-price vs. profit-share auction," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 336, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
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Cited by:
  1. Ding, Wei & Fan, Cuihong & Wolfstetter, Elmar G., 2013. "Horizontal mergers with synergies: Cash vs. profit-share auctions," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 382-391.
  2. Skrzypacz, Andrzej, 2013. "Auctions with contingent payments — An overview," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 666-675.

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