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High Bids and Broke Winners

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  • Zheng, Charles Zhoucheng

Abstract

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.

Suggested Citation

  • Zheng, Charles Zhoucheng, 2001. "High Bids and Broke Winners," Staff General Research Papers Archive 12665, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genres:12665
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