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Securities Auctions under Moral Hazard: An Experimental Study


  • Shimon Kogan
  • John Morgan


We study, both theoretically and in the lab, the performance of open outcry debt and equity auctions in the presence of both private information and hidden e¤ort in an independent private value setting. We characterize symmetric equilibrium bidding strategies and show that these lead to e¢ cient allocation. More interestingly, the revenue ranking between the debt and equity auctions depends on the returns to en- trepreneurial e¤ort. When returns are either very low or vary high, the equity auction leads to higher expected revenues to the seller than does the debt auction. When the returns to e¤ort are intermediate, we show that debt auctions can outperform equity auctions. We then test these predictions in a controlled laboratory setting and …nd broad support for the comparative predictions of the model.

Suggested Citation

  • Shimon Kogan & John Morgan, "undated". "Securities Auctions under Moral Hazard: An Experimental Study," GSIA Working Papers 2006-E23, Carnegie Mellon University, Tepper School of Business.
  • Handle: RePEc:cmu:gsiawp:2142915788

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    1. Yacine Aït-Sahalia & Andrew W. Lo, 1998. "Nonparametric Estimation of State-Price Densities Implicit in Financial Asset Prices," Journal of Finance, American Finance Association, vol. 53(2), pages 499-547, April.
    2. Van Huyck John B. & Battalio Raymond C. & Beil Richard O., 1993. "Asset Markets as an Equilibrium Selection Mechanism: Coordination Failure, Game Form Auctions, and Tacit Communication," Games and Economic Behavior, Elsevier, vol. 5(3), pages 485-504, July.
    3. Russell Cooper & Andrew John, 1988. "Coordinating Coordination Failures in Keynesian Models," The Quarterly Journal of Economics, Oxford University Press, vol. 103(3), pages 441-463.
    4. Crawford, Vincent P, 1995. "Adaptive Dynamics in Coordination Games," Econometrica, Econometric Society, vol. 63(1), pages 103-143, January.
    5. Harrison, Glenn W & Hirshleifer, Jack, 1989. "An Experimental Evaluation of Weakest Link/Best Shot Models of Public Goods," Journal of Political Economy, University of Chicago Press, vol. 97(1), pages 201-225, February.
    6. repec:spr:infosf:v:5:y:2003:i:1:d:10.1023_a:1022002107255 is not listed on IDEAS
    7. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
    8. Roberto A. Weber, 2006. "Managing Growth to Achieve Efficient Coordination in Large Groups," American Economic Review, American Economic Association, vol. 96(1), pages 114-126, March.
    9. Blume, Andreas & Ortmann, Andreas, 2007. "The effects of costless pre-play communication: Experimental evidence from games with Pareto-ranked equilibria," Journal of Economic Theory, Elsevier, vol. 132(1), pages 274-290, January.
    10. Frank Heinemann & Rosemarie Nagel & Peter Ockenfels, 2004. "The Theory of Global Games on Test: Experimental Analysis of Coordination Games with Public and Private Information," Econometrica, Econometric Society, vol. 72(5), pages 1583-1599, September.
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    Cited by:

    1. Isa Hafalir & Hadi Yektaş, 2011. "Selling goods of unknown quality: forward versus spot auctions," Review of Economic Design, Springer;Society for Economic Design, vol. 15(3), pages 245-256, September.
    2. Byoung Jun & Elmar Wolfstetter, 2014. "Security bid auctions for agency contracts," Review of Economic Design, Springer;Society for Economic Design, vol. 18(4), pages 289-319, December.
    3. Takeharu Sogo & Dan Bernhardt & Tingjun Liu, 2016. "Endogenous Entry to Security-Bid Auctions," American Economic Review, American Economic Association, vol. 106(11), pages 3577-3589, November.
    4. Vladimirov, Vladimir, 2015. "Financing bidders in takeover contests," Journal of Financial Economics, Elsevier, vol. 117(3), pages 534-557.
    5. Allison, Thomas H. & McKenny, Aaron F. & Short, Jeremy C., 2013. "The effect of entrepreneurial rhetoric on microlending investment: An examination of the warm-glow effect," Journal of Business Venturing, Elsevier, vol. 28(6), pages 690-707.
    6. Liu, Tingjun, 2016. "Optimal equity auctions with heterogeneous bidders," Journal of Economic Theory, Elsevier, vol. 166(C), pages 94-123.
    7. Skrzypacz, Andrzej, 2013. "Auctions with contingent payments — An overview," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 666-675.
    8. Dai, Yun & Gryglewicz, Sebastian & Smit, Han T.J. & De Maeseneire, Wouter, 2013. "Similar bidders in takeover contests," Games and Economic Behavior, Elsevier, vol. 82(C), pages 544-561.
    9. Abhishek, Vineet & Hajek, Bruce & Williams, Steven R., 2015. "On bidding with securities: Risk aversion and positive dependence," Games and Economic Behavior, Elsevier, vol. 90(C), pages 66-80.
    10. repec:eee:indorg:v:55:y:2017:i:c:p:166-181 is not listed on IDEAS
    11. Di Corato, Luca & Dosi, Cesare & Moretto, Michele, 2015. "Multidimensional auctions for long-term procurement contracts under the threat of early exit: the case of conservation auctions," Working Paper Series 2015:6, Swedish University of Agricultural Sciences, Department Economics.
    12. Alexander S. Gorbenko & Andrey Malenko, 2011. "Competition among Sellers in Securities Auctions," American Economic Review, American Economic Association, vol. 101(5), pages 1806-1841, August.

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