Debt- Versus Equity-Financing in Auction Designs
Abstract�A social planner wishes to launch a project but the contenders capable of running the project are cash-constrained and may default. �To signal their capabilities, the contenders may finance their bids through debt or equity, depending on the mechanism chosen by the social planner. �When moral hazard is absent, it is established as theorems that the ex post efficient social choice function cannot be achieved by any mechanism using only debt financing and can be achieved by a mechanism using equity financing. �When moral hazard is present, however, it is illustrated heuristically that equity share discourages effort and exacerbates default more than risky debt does.
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Bibliographic InfoPaper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 31517.
Date of creation: 18 May 2010
Date of revision:
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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
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More information through EDIRC
auction; finance; debt; equity; default; financial constraint; budget constraint;
Find related papers by JEL classification:
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
- D92 - Microeconomics - - Intertemporal Choice - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-05-29 (All new papers)
- NEP-CTA-2010-05-29 (Contract Theory & Applications)
- NEP-MIC-2010-05-29 (Microeconomics)
- NEP-PPM-2010-05-29 (Project, Program & Portfolio Management)
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.:
- Matthew Rhodes-Kropf & S. Viswanathan, 2005. "Financing Auction Bids," RAND Journal of Economics, The RAND Corporation, vol. 36(4), pages 789-815, Winter.
- Maskin, Eric S., 2000. "Auctions, development, and privatization: Efficient auctions with liquidity-constrained buyers," European Economic Review, Elsevier, vol. 44(4-6), pages 667-681, May.
- Che, Yeon-Koo & Gale, Ian, 1998. "Standard Auctions with Financially Constrained Bidders," Review of Economic Studies, Wiley Blackwell, vol. 65(1), pages 1-21, January.
- Simon Board, 2007. "Bidding into the Red: A Model of Post-Auction Bankruptcy," Journal of Finance, American Finance Association, vol. 62(6), pages 2695-2723, December.
- Waehrer Keith, 1995. "A Model of Auction Contracts with Liquidated Damages," Journal of Economic Theory, Elsevier, vol. 67(2), pages 531-555, December.
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