An Analysis of Market-Based and Statutory Limited Liability in Second Price Auctions
AbstractIn auctions where bidders are uncertain of their value and are fully liable for their bids, there exists the potential for losses if bids exceed realized values. Theoretically, bids will be higher if bidders are able to mitigate this downside loss through some form of limited liability. To determine the impact of differing forms of limited liability, this paper theoretically and experimentally examines a second price auction with uncertain private values in three environments: market-based limited liability, statutory limited liability, and full liability. Market-based limited liability is induced through inter-bidder resale following the auction. Statutory limited liability is created through a default penalty option in the event that a bidder would make a loss. Bids are theoretically shown to be higher under resale and the penalty default environments than under full liability. The experimental results confirm more aggressive bidding for resale and the low penalty default treatments, but not by as much as theory predicts. Notably, under the high default penalty bidders are not bidding significantly more than under full liability, despite the theoretical prediction that they should.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 25143.
Date of creation: Oct 2009
Date of revision:
Auctions; Limited Liability; Resale; Experimental Economics;
Find related papers by JEL classification:
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
- C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-09-25 (All new papers)
- NEP-CTA-2010-09-25 (Contract Theory & Applications)
- NEP-EXP-2010-09-25 (Experimental Economics)
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