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High Bids and Broke Winners

  • Zheng, Charles Zhoucheng

This paper analyzes auctions where budget-constrained bidders have options to declare bankruptcy. It predicts a bidding equilibrium that changes is continuously in a borrowing rate available to bidders. When the borrowing rate is above a threshold, high-budget bidders win, and the likelihood of bankruptcy is low. When the borrowing rate is below the threshold, the winner is the most budget-constrained bidder and is most likely to declare bankruptcy. This result explains the モhigh bids and broke winnersヤ anomaly in the C-Block FCC spectrum auction. Based on its equilibrium analysis, the paper proves that a seller can profit from offering to finance the highest bidder at a below-market interest rate, even with default risk.

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Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 12665.

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Date of creation: 01 Sep 2001
Date of revision:
Publication status: Published in Journal of Economic Theory, September 2001, vol. 100 no. 1, pp. 129-171
Handle: RePEc:isu:genres:12665
Contact details of provider: Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
Web page: http://www.econ.iastate.edu
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  1. Andrew Schotter & Allan Corns, 1999. "Can Affirmative Action Be Cost Effective? An Experimental Examination of Price-Preference Auctions," American Economic Review, American Economic Association, vol. 89(1), pages 291-305, March.
  2. Laffont, Jean-Jacques & Robert, Jacques, 1996. "Optimal auction with financially constrained buyers," Economics Letters, Elsevier, vol. 52(2), pages 181-186, August.
  3. Che, Yeon-Koo & Gale, Ian, 2000. "The Optimal Mechanism for Selling to a Budget-Constrained Buyer," Journal of Economic Theory, Elsevier, vol. 92(2), pages 198-233, June.
  4. Che, Yeon-Koo & Gale, Ian, 1998. "Standard Auctions with Financially Constrained Bidders," Review of Economic Studies, Wiley Blackwell, vol. 65(1), pages 1-21, January.
  5. Waehrer Keith, 1995. "A Model of Auction Contracts with Liquidated Damages," Journal of Economic Theory, Elsevier, vol. 67(2), pages 531-555, December.
  6. Ian Ayres & Peter Cramton, 1996. "Deficit Reduction Through Diversity: How Affirmative Action at the FCC Increased Auction Competition," Papers of Peter Cramton 96slr, University of Maryland, Department of Economics - Peter Cramton, revised 09 Jun 1998.
  7. John H. Kagel & Colin M. Campbell & Dan Levin, 1999. "The Winner's Curse and Public Information in Common Value Auctions: Reply," American Economic Review, American Economic Association, vol. 89(1), pages 325-334, March.
  8. Carolyn Pitchik & Andrew Schotter, 1988. "Perfect Equilibria in Budget-Constrained Sequential Auctions: An Experimental Study," RAND Journal of Economics, The RAND Corporation, vol. 19(3), pages 363-388, Autumn.
  9. Arijit Sen, 1998. "Seller Financing of Consumer Durables," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 7(3), pages 435-460, 09.
  10. Che, Yeon-Koo & Gale, Ian, 1996. "Expected revenue of all-pay auctions and first-price sealed-bid auctions with budget constraints," Economics Letters, Elsevier, vol. 50(3), pages 373-379, March.
  11. Hansen, Robert G & Lott, John R, Jr, 1991. "The Winner's Curse and Public Information in Common Value Auctions: Comment," American Economic Review, American Economic Association, vol. 81(1), pages 347-61, March.
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