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The Default-Prone U.S. Toxic Asset Auction Plan

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  • Zheng, Charles Zhoucheng

Abstract

Applying auction theory to the toxic-asset rescue plan currently released by the United States Treasury Department, this paper demonstrates an equilibrium where moderately poor bidders outbid rich bidders in such auctions. After defeating their rich rivals and acquiring the toxic assets, such bidders will default on government-provided loans whenever the toxic assets turn out to be unsalvageable. An alternative mechanism is discussed.

Suggested Citation

  • Zheng, Charles Zhoucheng, 2009. "The Default-Prone U.S. Toxic Asset Auction Plan," Staff General Research Papers Archive 13056, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genres:13056
    as

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    File URL: http://www2.econ.iastate.edu/papers/paper_13056_09005.pdf
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    References listed on IDEAS

    as
    1. Zheng, Charles Z., 2001. "High Bids and Broke Winners," Journal of Economic Theory, Elsevier, vol. 100(1), pages 129-171, September.
    2. Yeon-Koo Che & Ian Gale, 1998. "Standard Auctions with Financially Constrained Bidders," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 65(1), pages 1-21.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Linus Wilson, 2011. "Troubling Research on Troubled Assets: Charles Zheng on the U.S. Toxic Asset Auction Plan," Econ Journal Watch, Econ Journal Watch, vol. 8(1), pages 33-38, January.
    2. Ottorino Chillemi & Claudio Mezzetti, 2014. "Optimal procurement mechanisms: bidding on price and damages for breach," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 55(2), pages 335-355, February.
    3. Wilson, Linus, 2011. "A binomial model of Geithner's toxic asset plan," Journal of Economics and Business, Elsevier, vol. 63(5), pages 349-371, September.

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    More about this item

    Keywords

    auction; toxic assets; default; rescue plan;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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