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Security Bid Auctions for Agency Contracts

  • Byoung Heon Jun
  • Elmar G. Wolfstetter

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, a hybrid share auction that includes a (possibly negative) cash reward to the winner, a minimum share, and an option to call a fixed wage contract, tends to outperform all other auctions, although it is not an optimal mechanism. However, by adding output targets to hybrid share auctions one can (arbitrary closely) implement the optimal mechanism.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4554.

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Date of creation: 2013
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Handle: RePEc:ces:ceswps:_4554
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  1. Shimon Kogan & John Morgan, . "Securities Auctions under Moral Hazard: An Experimental Study," GSIA Working Papers 2006-E23, Carnegie Mellon University, Tepper School of Business.
  2. Yeon-Koo Che & Jinwoo Kim, 2009. "Bidding With Securities: Comment," Discussion Papers 0809-10, Columbia University, Department of Economics.
  3. Innes, Robert D., 1990. "Limited liability and incentive contracting with ex-ante action choices," Journal of Economic Theory, Elsevier, vol. 52(1), pages 45-67, October.
  4. Peter M. DeMarzo & Ilan Kremer & Andrzej Skrzypacz, 2004. "Bidding With Securities: Auctions and Security Design," NBER Working Papers 10891, National Bureau of Economic Research, Inc.
  5. Board, Simon, 2007. "Selling options," Journal of Economic Theory, Elsevier, vol. 136(1), pages 324-340, September.
  6. Samuelson, William, 1987. "Auctions with Contingent Payments: Comment," American Economic Review, American Economic Association, vol. 77(4), pages 740-45, September.
  7. Skrzypacz, Andrzej, 2013. "Auctions with contingent payments — An overview," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 666-675.
  8. Laffont, Jean-Jacques & Tirole, Jean, 1987. "Auctioning Incentive Contracts," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 921-37, October.
  9. 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.
  10. Gary Biglaiser & Claudio Mezzetti, 2000. "Incentive Auctions and Information Revelation," RAND Journal of Economics, The RAND Corporation, vol. 31(1), pages 145-164, Spring.
  11. Cremer, Jacques, 1987. "Auctions with Contingent Payments: Comment," American Economic Review, American Economic Association, vol. 77(4), pages 746, September.
  12. Hansen, Robert G, 1985. "Auctions with Contingent Payments," American Economic Review, American Economic Association, vol. 75(4), pages 862-65, September.
  13. Matthew Rhodes-Kropf & S. Viswanathan, 2005. "Financing Auction Bids," RAND Journal of Economics, The RAND Corporation, vol. 36(4), pages 789-815, Winter.
  14. Ding, Wei & Fan, Cuihong & Wolfstetter, Elmar G., 2013. "Horizontal mergers with synergies: Cash vs. profit-share auctions," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 382-391.
  15. R. Preston McAfee & John McMillan, 1987. "Competition for Agency Contracts," RAND Journal of Economics, The RAND Corporation, vol. 18(2), pages 296-307, Summer.
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