An Analysis of Market-Based and Statutory Limited Liability in Second Price Auctions

Krista Saral

MPRA Paper from University Library of Munich, Germany

Abstract: In auctions where bidders are uncertain of their value and are fully liable for their bids, there exists the potential for losses if bids exceed realized values. Theoretically, bids will be higher if bidders are able to mitigate this downside loss through some form of limited liability. To determine the impact of differing forms of limited liability, this paper theoretically and experimentally examines a second price auction with uncertain private values in three environments: market-based limited liability, statutory limited liability, and full liability. Market-based limited liability is induced through inter-bidder resale following the auction. Statutory limited liability is created through a default penalty option in the event that a bidder would make a loss. Bids are theoretically shown to be higher under resale and the penalty default environments than under full liability. The experimental results confirm more aggressive bidding for resale and the low penalty default treatments, but not by as much as theory predicts. Notably, under the high default penalty bidders are not bidding significantly more than under full liability, despite the theoretical prediction that they should.

Keywords: Auctions; Limited Liability; Resale; Experimental Economics (search for similar items in EconPapers)
JEL-codes: C90 D44 (search for similar items in EconPapers)
Date: 2009-10
New Economics Papers: this item is included in nep-cta and nep-exp
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/25143/1/MPRA_paper_25143.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/85145/1/MPRA_paper_85145.pdf revised version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:25143

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().