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Auctions vs. Negotiations: The Role of the Payment Structure

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  • Hoffmann, Florian
  • Vladimirov, Vladimir

Abstract

We investigate a seller's strategic choice between optimally-structured negotiations with fewer bidders and an auction with more competing bidders when payments can have a contingent component, as is common in mergers and acquisitions, patent licensing, and employee compensation. The key factor favoring negotiations is that it allows the seller to set her preferred payment structure ---i.e., the revenue-maximizing mix of cash and contingent pay; reserve prices are of secondary importance. Negotiations are more likely to dominate if synergies increase in bidders' productivity types (as with acquirer-target complementarities in M&A). Higher dispersion and magnitude of bidders' private valuations also favor negotiations.

Suggested Citation

  • Hoffmann, Florian & Vladimirov, Vladimir, 2025. "Auctions vs. Negotiations: The Role of the Payment Structure," CEPR Discussion Papers 20703, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:20703
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    File URL: https://cepr.org/publications/DP20703
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    Keywords

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    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
    • J54 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Producer Cooperatives; Labor Managed Firms
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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