High Bids and Broke Winners
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.
Year of publication: |
2001-09-01
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Authors: | Zheng, Charles Zhoucheng |
Institutions: | Department of Economics, Iowa State University |
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