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The Value of Information in Auctions with Default Risk

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  • Lamping, Jennifer

Abstract

After the close of an auction, the winning bidder may find that he is unable to carry out his bid offer. This paper seeks to determine what measures the seller should take to maximize his share of the surplus when bidders are privately informed about their risk of default. Special attention is paid to the effect of imposing a default penalty, the value of gathering information about each bidder's default risk, and the role of commitment. It is shown that the value of gathering information is negligible when the seller has commitment power and negative when the seller lacks commitment power. When the seller is informed about each bidder's risk, the seller benefits from the ability to commit. However, when the seller is uninformed, he is able to capture nearly all the surplus independent of whether or not he has commitment power.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 24375.

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Date of creation: 16 Nov 2007
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Handle: RePEc:pra:mprapa:24375

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Related research

Keywords: Asymmetries; Auctions; Auction Theory; Bidding; Information Revelation; Signaling;

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References

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  1. Paul Milgrom & Robert J. Weber, 1981. "The Value of Information in a Sealed-Bid Auction," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 462, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Che, Y.K., 1991. "Design Competition through Multidimensional Auctions," Working papers, Wisconsin Madison - Social Systems 9123, Wisconsin Madison - Social Systems.
  3. Riley, John G & Samuelson, William F, 1981. "Optimal Auctions," American Economic Review, American Economic Association, American Economic Association, vol. 71(3), pages 381-92, June.
  4. Leonardo Rezende, 2009. "Biased procurement auctions," Economic Theory, Springer, Springer, vol. 38(1), pages 169-185, January.
  5. Zheng, Charles Zhoucheng, 2001. "High Bids and Broke Winners," Staff General Research Papers, Iowa State University, Department of Economics 12665, Iowa State University, Department of Economics.
  6. Goeree, Jacob K., 2003. "Bidding for the future: signaling in auctions with an aftermarket," Journal of Economic Theory, Elsevier, Elsevier, vol. 108(2), pages 345-364, February.
  7. Lamping, Jennifer, 2008. "Ignorance Is Bliss: Matching in Auctions with an Uninformed Seller," MPRA Paper 24374, University Library of Munich, Germany.
  8. Estelle Cantillon, 2000. "The Effect of Bidders' Asymmetries on Expected Revenue in Auctions," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1279, Cowles Foundation for Research in Economics, Yale University.
  9. Waehrer Keith, 1995. "A Model of Auction Contracts with Liquidated Damages," Journal of Economic Theory, Elsevier, Elsevier, vol. 67(2), pages 531-555, December.
  10. Eric Maskin & John G. Riley, 1986. "Existence and Uniqueness of Equilibrium in Sealed High Bid Auctions," UCLA Economics Working Papers, UCLA Department of Economics 407, UCLA Department of Economics.
  11. Spulber, Daniel F, 1990. "Auctions and Contract Enforcement," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 6(2), pages 325-44, Fall.
  12. Charles Z. Zheng, 2000. "Optimal Auction in a Multidimensional World," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 1282, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  13. Hansen, Robert G & Lott, John R, Jr, 1991. "The Winner's Curse and Public Information in Common Value Auctions: Comment," American Economic Review, American Economic Association, American Economic Association, vol. 81(1), pages 347-61, March.
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