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The Value of Information in Auctions with Default Risk

  • Lamping, Jennifer

After the close of an auction, the winning bidder may find that he is unable to carry out his bid offer. This paper seeks to determine what measures the seller should take to maximize his share of the surplus when bidders are privately informed about their risk of default. Special attention is paid to the effect of imposing a default penalty, the value of gathering information about each bidder's default risk, and the role of commitment. It is shown that the value of gathering information is negligible when the seller has commitment power and negative when the seller lacks commitment power. When the seller is informed about each bidder's risk, the seller benefits from the ability to commit. However, when the seller is uninformed, he is able to capture nearly all the surplus independent of whether or not he has commitment power.

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File URL: https://mpra.ub.uni-muenchen.de/24375/1/MPRA_paper_24375.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 24375.

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Date of creation: 16 Nov 2007
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Handle: RePEc:pra:mprapa:24375
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  1. Lamping, Jennifer, 2008. "Ignorance Is Bliss: Matching in Auctions with an Uninformed Seller," MPRA Paper 24374, University Library of Munich, Germany.
  2. Cantillon, Estelle, 2008. "The effect of bidders' asymmetries on expected revenue in auctions," Games and Economic Behavior, Elsevier, vol. 62(1), pages 1-25, January.
  3. John G. Riley & William Samuelson, 1979. "Optimal Auctions," UCLA Economics Working Papers 152, UCLA Department of Economics.
  4. Paul Milgrom & Robert J. Weber, 1981. "The Value of Information in a Sealed-Bid Auction," Discussion Papers 462, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. Charles Z. Zheng, 2000. "Optimal Auction in a Multidimensional World," Discussion Papers 1282, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Zheng, Charles Z., 2001. "High Bids and Broke Winners," Journal of Economic Theory, Elsevier, vol. 100(1), pages 129-171, September.
  7. Che, Y.K., 1991. "Design Competition through Multidimensional Auctions," Working papers 9123, Wisconsin Madison - Social Systems.
  8. Goeree, Jacob K., 2003. "Bidding for the future: signaling in auctions with an aftermarket," Journal of Economic Theory, Elsevier, vol. 108(2), pages 345-364, February.
  9. Spulber, Daniel F, 1990. "Auctions and Contract Enforcement," Journal of Law, Economics and Organization, Oxford University Press, vol. 6(2), pages 325-44, Fall.
  10. 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.
  11. Leonardo Rezende, 2009. "Biased procurement auctions," Economic Theory, Springer, vol. 38(1), pages 169-185, January.
  12. Eric Maskin & John G. Riley, 1986. "Existence and Uniqueness of Equilibrium in Sealed High Bid Auctions," UCLA Economics Working Papers 407, UCLA Department of Economics.
  13. Waehrer Keith, 1995. "A Model of Auction Contracts with Liquidated Damages," Journal of Economic Theory, Elsevier, vol. 67(2), pages 531-555, December.
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