Equity auctions with bidder moral hazard

This study considers standard equity auctions in the presence of winner’s post-auction effort as bidder moral hazard. The valuation of the auctioned object is endogenously determined by the winner’s effort and private type. We characterize the equilibria of the first-price equity auction (FPEA) and the second-price equity auction (SPEA) under various environments with bidder moral hazard. Regarding performance comparison, we identify the conditions under which the FPEA features, in equilibrium, a lower equity share payment, higher total surplus, equal bidder payoffs, and a higher seller payoff in expectation. Consequently, the FPEA Pareto dominates the SPEA in terms of expected bidder and seller payoffs. We further identify the conditions under which bidder payoff equivalence does not hold while the FPEA maintains an advantage in the expected total surplus and the expected seller payoff. Lastly, we compare equity auctions with fixed-royalty auctions under bidder moral hazard and investigate equity auctions under double moral hazard.