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The design of first-price debt auction when the winning bidder can install capacity that can be expanded or contracted later

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  • Jyh-Bang Jou

Abstract

This paper investigates how a seller designs the down payment rate and a bidder’s strategy in equilibrium in a first-price debt auction in which the winning bidder can exercise an investment project that can be expanded or contracted later. I find that the seller should ask a higher rate and a bidder will bid more when the bidder suffers larger losses in bankruptcy. This finding also applies to the case in which the winning bidder resells the installed capital stock at a lower price provided that he maintains the same or expands capacity on the verge of bankruptcy. As compared to the case in which a seller optimally designs the down payment rate, the seller who sets a lower one will receive lower revenue and the winning bidder, who installs a smaller capacity, will bid less and thus gain more, but his probability of bankruptcy will remain unchanged.

Suggested Citation

  • Jyh-Bang Jou, 2023. "The design of first-price debt auction when the winning bidder can install capacity that can be expanded or contracted later," The European Journal of Finance, Taylor & Francis Journals, vol. 29(5), pages 527-541, March.
    • Handle: RePEc:taf:eurjfi:v:29:y:2023:i:5:p:527-541
    DOI: 10.1080/1351847X.2022.2075781
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