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Security bid auctions for agency contracts

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  • Jun, Byoung Heon
  • Wolfstetter, Elmar G.

Abstract

A principal uses security bid auctions to award an incentive contract to one among several agents, in the presence of hidden action and hidden information. Securities range from cash to equity and call options. “Steeper†securities are better surplus extractors that narrow the gap between the two highest valuations, yet reduce effort incentives. In view of this trade-off, the generalized equity auction that includes a (possibly negative) cash reward to the winner tends to outperform all other auctions, although it cannot extract the entire surplus implement efficient effort. Hence, profit sharing emerges without risk aversion or limited liability.

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Bibliographic Info

Paper provided by Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems with number 371.

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Date of creation: Jan 2012
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Handle: RePEc:trf:wpaper:371

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Keywords: Auctions; agency problems; licensing; innovation; mechanism design;

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References

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  1. Skrzypacz, Andrzej, 2013. "Auctions with contingent payments — An overview," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 31(5), pages 666-675.
  2. Shimon Kogan & John Morgan, 2010. "Securities Auctions under Moral Hazard: An Experimental Study," Review of Finance, European Finance Association, European Finance Association, vol. 14(3), pages 477-520.
  3. Samuelson, William, 1987. "Auctions with Contingent Payments: Comment," American Economic Review, American Economic Association, American Economic Association, vol. 77(4), pages 740-45, September.
  4. Andrzej Skrzypacz & Peter M. DeMarzo & Ilan Kremer, 2004. "Bidding with Securities: Auctions and Security Design," Econometric Society 2004 North American Winter Meetings 637, Econometric Society.
  5. Jean-Jaques Laffont & Jean Tirole, 1985. "Auctioning Incentive Contracts," Working papers 403, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Yeon-Koo Che & Jinwoo Kim, 2010. "Bidding with Securities: Comment," American Economic Review, American Economic Association, American Economic Association, vol. 100(4), pages 1929-35, September.
  7. Board, Simon, 2007. "Selling options," Journal of Economic Theory, Elsevier, vol. 136(1), pages 324-340, September.
  8. R. Preston McAfee & John McMillan, 1987. "Competition for Agency Contracts," RAND Journal of Economics, The RAND Corporation, vol. 18(2), pages 296-307, Summer.
  9. Matthew Rhodes-Kropf & S. Viswanathan, 2005. "Financing Auction Bids," RAND Journal of Economics, The RAND Corporation, vol. 36(4), pages 789-815, Winter.
  10. Ding, Wei & Fan, Cuihong & Wolfstetter, Elmar G., 2010. "Horizontal mergers with synergies: first-price vs. profit-share auction," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 336, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  11. Hansen, Robert G, 1985. "Auctions with Contingent Payments," American Economic Review, American Economic Association, American Economic Association, vol. 75(4), pages 862-65, September.
  12. Cremer, Jacques, 1987. "Auctions with Contingent Payments: Comment," American Economic Review, American Economic Association, American Economic Association, vol. 77(4), pages 746, September.
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Cited by:
  1. Skrzypacz, Andrzej, 2013. "Auctions with contingent payments — An overview," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 31(5), pages 666-675.
  2. Ding, Wei & Fan, Cuihong & Wolfstetter, Elmar G., 2013. "Horizontal mergers with synergies: Cash vs. profit-share auctions," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 31(5), pages 382-391.

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