The Optimal Design of First-Price Auctions with Financial Constraints and Default Risks

If the bidders in an auction have financial constraints, how should the seller design the auction to maximize his profit? An observed practice is that the seller offers a loan, or interest subsidy, to the highest bidder. The work by Che and Gale [3] has given a partial answer for second-price auctions, with default risk assumed away. This paper provides a complete solution for first-price auctions, with default risk included. For each level of the interest subsidy, we solve the auction game and give a closed form solution for its symmetric equilibrium.