High Bids and Broke Winners
This paper analyzes auctions where budget-constrained bidders have options to declare bankruptcy. It predicts a bidding equilibrium that changes is continuously in a borrowing rate available to bidders. When the borrowing rate is above a threshold, high-budget bidders win, and the likelihood of bankruptcy is low. When the borrowing rate is below the threshold, the winner is the most budget-constrained bidder and is most likely to declare bankruptcy. This result explains the ï¾“high bids and broke winnersï¾” anomaly in the C-Block FCC spectrum auction. Based on its equilibrium analysis, the paper proves that a seller can profit from offering to finance the highest bidder at a below-market interest rate, even with default risk.
(This abstract was borrowed from another version of this item.)
References listed on IDEAS
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.:
- Ian Ayres & Peter Cramton, 1996. "Deficit Reduction Through Diversity: How Affirmative Action at the FCC Increased Auction Competition," Papers of Peter Cramton 96slr, University of Maryland, Department of Economics - Peter Cramton, revised 09 Jun 1998.
- Che, Yeon-Koo & Gale, Ian, 1996. "Expected revenue of all-pay auctions and first-price sealed-bid auctions with budget constraints," Economics Letters, Elsevier, vol. 50(3), pages 373-379, March.
- Arijit Sen, 1998. "Seller Financing of Consumer Durables," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 7(3), pages 435-460, 09.
- Andrew Schotter & Allan Corns, 1999.
"Can Affirmative Action Be Cost Effective? An Experimental Examination of Price-Preference Auctions,"
American Economic Review,
American Economic Association, vol. 89(1), pages 291-305, March.
- Corns, Allan & Schotter, Andrew, 1996. "Can Affirmative Action be Cost-Effective? An Experimental Examination of Price-Preference Auctions," Working Papers 96-02, C.V. Starr Center for Applied Economics, New York University.
- 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, vol. 81(1), pages 347-61, March.
- Pitchik, Carolyn & Schotter, Andrew, 1986.
"Perfect Equilibria in Budget Constrained Sequential Auctions: An Experimental Study,"
86-22, C.V. Starr Center for Applied Economics, New York University.
- Carolyn Pitchik & Andrew Schotter, 1988. "Perfect Equilibria in Budget-Constrained Sequential Auctions: An Experimental Study," RAND Journal of Economics, The RAND Corporation, vol. 19(3), pages 363-388, Autumn.
- Che, Yeon-Koo & Gale, Ian, 2000. "The Optimal Mechanism for Selling to a Budget-Constrained Buyer," Journal of Economic Theory, Elsevier, vol. 92(2), pages 198-233, June.
- Laffont, Jean-Jacques & Robert, Jacques, 1996. "Optimal auction with financially constrained buyers," Economics Letters, Elsevier, vol. 52(2), pages 181-186, August.
- Waehrer Keith, 1995. "A Model of Auction Contracts with Liquidated Damages," Journal of Economic Theory, Elsevier, vol. 67(2), pages 531-555, December.
- John H. Kagel & Colin M. Campbell & Dan Levin, 1999.
"The Winner's Curse and Public Information in Common Value Auctions: Reply,"
American Economic Review,
American Economic Association, vol. 89(1), pages 325-334, March.
- Kagel, John H & Levin, Dan, 1991. "The Winner's Curse and Public Information in Common Value Auctions: Reply," American Economic Review, American Economic Association, vol. 81(1), pages 362-69, March.
- Yeon-Koo Che & Ian Gale, 1998. "Standard Auctions with Financially Constrained Bidders," Review of Economic Studies, Oxford University Press, vol. 65(1), pages 1-21.
When requesting a correction, please mention this item's handle: RePEc:eee:jetheo:v:100:y:2001:i:1:p:129-171. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)
If references are entirely missing, you can add them using this form.