Theory and Behavior of Multiple Unit Discriminative Auctions

This paper reports the results of controlled experiments designed to test the Harris-Raviv generalization of the Vickrey theory of bidding in multiple unit discriminative auctions. The paper also discusses further development of the theory—in a way suggested by the experimental results—to include bidders with distinct risk preferences.     

Simultaneous Pooled Auctions

Suppose a seller wants to sell k similar or identical objects and there are n > k potential buyers. Suppose that each buyer wants only one object. In this case, we suggest the use of a simultaneous auction that would work as follows. Players are asked to submit sealed bids for one object. The individual with the highest bid chooses an object first; the individual with the second-highest bid chooses the next object; and this process continues until the individual with the kth highest bid receives the last object. Each individual pays the equivalent to his or her bid. When objects are identical, we show that the proposed auction generates the same revenue as a first-price sealed-bid sequential auction. When objects are perfectly correlated, there is no known solution for sequential auctions, whereas we can characterize bidding strategies in the proposed auction. Moreover, the proposed auction is optimal (given an appropriately chosen reserve price), and it may be easier and cheaper to run than a sequential auction.     

Auctions in bankruptcy

This paper examines whether mandatory auctions promote the efficient restructuring of distressed firms relative to a reorganization-based bankruptcy system such as Chapter 11. Under a mandatory auction system, aggressive bidding by a coalition of incumbent management and pre-bankruptcy creditors may deter outside bidders, may result in the coalition paying more than its valuation to acquire the firm, and may result in assets remaining in a lower value use. In a reorganization-based bankruptcy system, management's voluntary choice to seek an auction conveys information about the coalition's valuation, which facilitates competition. Our model shows that a reorganization-based bankruptcy system that encourages, but does not mandate auctions, can actually increase the likelihood that an outside bidder enters and the assets of the bankrupt firm are redeployed.     

Corporate Reorganizations and Non-Cash Auctions

This paper extends the theory of non-cash auctions by considering the revenue and efficiency of using different securities. Research on bankruptcy and privatization suggests using non-cash auctions to increase cash-constrained bidder participation. We examine this proposal and demonstrate that securities may lead to higher revenue. However, bidders pool unless bids include debt,which results in possible repossession by the seller. This suggests all-equity outcomes are unlikely and explains the high debt of reorganized firms. Securities also inefficiently determine bidders' incentive contracts and the firm's capital structure. Therefore, we recommend a new cash auction for an incentive contract.     

Strategic Behavior and Underpricing in Uniform Price Auctions: Evidence from Finnish Treasury Auctions

We contribute to the debate on the optimal design of multiunit auctions by developing and testing robust implications of the leading theory of uniform price auctions on the bid distributions submitted by individual bidders. The theory, which emphasizes market power, has little support in a data set of Finnish Treasury auctions. A reason may be that the Treasury acts strategically by determining supply after observing bids, apparently treating the auctions as a repeated game between itself and primary dealers. Bidder behavior and underpricing react to the volatility of bond returns in a way that suggests bidders adjust for the winner's curse.     

Auctions with Endogenous Initiation

We study initiation of takeover auctions by potential buyers and the seller. A bidder's indication of interest reveals that she is optimistic about the target. If bidders' values have a substantial common component, as in takeover battles between financial bidders, this effect disincentivizes bidders from indicating interest, and auctions are seller-initiated. Conversely, in private-value auctions, such as battles between strategic bidders, equilibria can feature both seller- and bidder-initiated auctions, with the likelihood of the latter decreasing in commonality of values and the probability of a forced sale by the seller. We also relate initiation to bids and auction outcomes.     

Land Auctions with Budget Constraints

This paper tests for the effects of financial constraints on open-bid English land auction prices and bids. It is argued that bidders’ ability to pay, taken as capital resources and/or capital budget constraints, influence bids and final auction prices. While high capital resource developers may elect to bid more than optimal to win auctions, or bidders may elect to pool resources in joint bidding, budget constraints imposed by firm-specific financial variables on the other hand are expected to restrict bids. Land auction data in Hong Kong are used to test systematically these predictions. It is found that a firm’s age, the number of winners in a joint bid, and firm status in the market are positively related to prices, all factors which may be attributed to a firm’s ability to finance the auction price. Firm size, internal funds, financing cost, debt capacity and existing capital expenditure are also shown to affect bids submitted in land auctions: firm size and internal funds are positively related to bid prices; while constrained debt capacity, financing cost and existing capital expenditure lower bids. The results are consistent with predictions that a firm’s financial constraints, and thus its effect on capital budgets, are relevant factors in predicting land auction outcomes. More generally, these findings confirm that similar financial factors that constrain corporate capital investment also influence directly acquisition of assets at auctions.     

Resource Allocation Auctions within Firms

There is growing interest in the use of markets within firms. Proponents have noted that markets are a simple and efficient mechanism for allocating resources in economies in which information is dispersed. In contrast to the use of markets in the broader economy, the efficiency of an internal market is determined in large part by the endogenous contractual incentives provided to the participating, privately informed agents. In this paper, we study the optimal design of managerial incentives when resources are allocated by an internal auction market, as well as the efficiency of the resulting resource allocations. We show that the internal auction market can achieve first‐best resource allocations and decisions, but only at an excessive cost in compensation payments. We then identify conditions under which the internal auction market and associated optimal incentive contracts achieve the benchmark second‐best outcome as determined using a direct revelation mechanism. The advantage of the auction is that it is easier to implement than the direct revelation mechanism. When the internal auction mechanism is unable to achieve second‐best, we characterize the factors that determine the magnitude of the shortfall. Overall, our results speak to the robust performance of relatively simple market mechanisms and associated incentive systems in resolving resource allocation problems within firms.     

Strategic and Financial Bidders in Takeover Auctions

Using data on auctions of companies, we estimate valuations (maximum willingness to pay) of strategic and financial bidders from their bids. We find that a typical target is valued higher by strategic bidders. However, 22.4% of targets in our sample are valued higher by financial bidders. These are mature, poorly performing companies. We also find that (i) valuations of different strategic bidders are more dispersed and (ii) valuations of financial bidders are correlated with aggregate economic conditions. Our results suggest that different targets appeal to different types of bidders, rather than that strategic bidders always value targets more because of synergies.     

Repo Auctions and the Market for Liquidity

What is the nature of imperfections in the market for liquidity? Studying bidder level data from European Central Bank (ECB) repo auctions, we find that this market appears to be informationally efficient in the sense that participants do not have private information about future short‐term rates. However, auction allocations affect banks' subsequent behavior in a way that is consistent with a degree of allocational and operational inefficiency. Also, large bidders appear to have better access to the interbank market than small ones. Finally, the evidence suggests that the ECB uses collateral haircuts that do not equilibrate opportunity costs.     

Auctions with heterogeneous entry costs

If bidders have independent private values and homogeneous entry costs, a first‐ or second‐price auction with a reserve price equal to the seller’s value maximizes social surplus and seller revenue. We show that if entry costs are heterogeneous and private information, then the revenue‐maximizing reserve price is above the seller’s value, a positive admission fee (and a reserve price equal to the seller’s value) generates more revenue, and an entry cap combined with an admission fee generates even more revenue. Social surplus and seller revenue may either increase or decrease in the number of bidders, but they coincide asymptotically.     

Underpricing and Market Power in Uniform Price Auctions

In uniform auctions, buyers choose demand schedules as strategiesand pay the same "market clearing" price for units awarded.Despite the widespread use of these auctions, the extant theoryshows that they are susceptible to arbitrarily large underpricing.We make a realistic modification to the theory by letting prices,quantities, and bids be discrete. We show that underpricingcan be made arbitrarily small by choosing a sufficiently smallprice tick size and a sufficiently large quantity multiple.We also show how one might improve revenues by modifying theallocation rule. A trivial change in the design can have a dramaticimpact on prices. Our conclusions are robust to bidders beingcapacity constrained. Finally, we examine supply uncertaintyrobust equilibria.     

Auctions with ex post uncertainty

Uncertainty about ex post realized values is an inherent component in many auction environments. In this article, we develop a structural framework to analyze auction data subject to ex post uncertainty as a pure risk. We consider a low‐price sealed‐bid auction model with heterogeneous bidders' preferences and ex post uncertainty. The uncertainty can be common to all bidders or idiosyncratic. We derive the model restrictions and study nonparametric and semiparametric identification of the model primitives under exogenous and endogenous participation. We then develop multistep nonparametric and semiparametric estimation procedures in both cases.     

Bidding to lose? Auctions with resale

A losing bidder can still purchase the prize from the winner after the auction. We show why a strong bidder may prefer to drop out of the auction before the price has reached her valuation and acquire the prize in the aftermarket: a strong bidder may be in a better bargaining position in the aftermarket if her rival won at a relatively low price. So it can be common knowledge that, in equilibrium, a weak bidder will win the auction and, even without uncertainty about relative valuations, resale will take place. The possibility of reselling to a strong bidder attracts weak bidders to participate in the auction and raises the seller's revenue.     

Walrasian Tatonnement Auctions on the Tokyo Grain Exchange

The Tokyo Grain Exchange (TGE)’s itayose mechanism providesthe opportunity to analyze functioning Walrasian tâtonnementauctions (WTA). In 15,677 auctions conducted over 1997–1998for corn and redbean futures contracts, price formation is unexpectedlysimilar to that observed in continuous double auctions. Provisionalprices and pledges are informative. In contrast to behaviorobserved in experiments, few pledges are deceptive, becausethe traders participate repeatedly and because the auctioneerhas flexibility when changing the provisional price and endingthe auction. Both the risk of the auction ending and the moreequitable dispersion of information increase depth and the speedat which information is embodied in price.     

Return and Maturity Relationships for Treasury Auctions: Evidence from Turkey

The relationship between the interest rate and the maturity of newly issued bonds provides information on the debt dynamics of an economy as well as on the sustainability of its debt. Such information is crucial especially for countries that have debt‐rollover concerns due to financial stress and/or macroeconomic instability. This study investigates the relationship between treasury auction maturity, which also dictates the debt maturity, and auction interest rates. When the Turkish treasury auction data from 1988 to 2004 are analysed, a reciprocal linkage between auction interest rates and maturities can be observed, especially for the 1995–2000 period, when there were chronic high inflation, high political uncertainty, high public deficits and unsuccessful attempts at stabilisation. This suggests that under an adverse shock, the Treasury decreases the auction maturity in order not to increase interest rates too much. A change in this reciprocal relationship is also reported for the post‐2001 era, which is characterised by decreasing inflation, higher political stability, lower public deficits and successful stabilisation attempts.     

Competition and Cooperation in Divisible Good Auctions: An Experimental Examination

An experimental approach is used to examine the performanceof three different multiunit auction designs: discriminatory,uniform-price with fixed supply, and uniform-price with endogenoussupply. We find the actual strategies to be inconsistent withtheoretically identified equilibrium strategies. The discriminatoryauction is found to be more susceptible to collusion than eitheruniform-price auction and so, contrary to theoretical predictionsand previous experimental results, it generates the lowest averagerevenue. Consistent with theoretical predictions, the actualbid schedules are more elastic with reducible supply or discriminatorypricing than in the uniform-price auction with fixed supply.     

Theoretical Implications of Imperfect Competition on Quota License Prices and Auctions

This article looks at the implications for trade policy of recentwork on quota auctions. Recent work has considered a varietyof market structures in addition to the standard one of monopolyin the product market. It has also emphasized details of theimplementation process, as well as the timing of decisions anddynamic factors. Such considerations are shown to be important,because they can greatly affect the outcome of trade policies.