Experimental Auctions with Securities

We experimentally implement security-bid auctions, which are used around the world to sell projects that generate large future cash flows that are stochastic. Buyers make bids with debt and equity, linking payments to the project’s ex-post revenue. Contrary to the theoretical predictions, we find that debt auctions generate more revenue than equity auctions. This is explained by overbidding in debt auctions. Furthermore, we find that second-price equity auctions generate slightly more surplus than other treatments and that noisy bidding has differential effects depending on the format. We also implement informal auctions and find that buyers use equity more often than theory predicts and that sellers successfully choose dominant bids.