Bidding into the Red: A Model of Post-Auction Bankruptcy

This paper investigates auctions where bidders have limited liability. First, we analyze bidding behavior under different auction formats, showing that the second-price auction induces higher prices, higher bankruptcy rates, and lower utilities than the firstprice auction. Second, we show that the c...

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Bibliographic Details
Published in:The Journal of finance (New York) 2007-12, Vol.62 (6), p.2695-2723
Main Author: BOARD, SIMON
Format: Article
Language:English
Subjects:
Auctions
Bank assets
Bankruptcy
Bid price
Bidders
Bidding
Costs
Financial engineering
Liability
Limited liability
Livestock auctions
Payments
Resale
Revenue
Solvency
Studies
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Summary:This paper investigates auctions where bidders have limited liability. First, we analyze bidding behavior under different auction formats, showing that the second-price auction induces higher prices, higher bankruptcy rates, and lower utilities than the firstprice auction. Second, we show that the cost of bankruptcy critically affects the seller's preference over the choice of auction. If bankruptcy is very costly, the seller prefers the first-price auction over the second-price auction. Alternatively, if the bankrupt assets are resold among the losers of the initial auction, the seller prefers the second-price auction.
ISSN:0022-1082
1540-6261
DOI:10.1111/j.1540-6261.2007.01290.x