Bidding securities in projects with negative externalities

Allan Hernandez-Chanto and Andres Fioriti
Authors registered in the RePEc Author Service: Allan Hernández

European Economic Review, 2019, vol. 118, issue C, 14-36

Abstract: We analyze the allocation of an indivisible project in a security-bid auction in which: (i) the allocation of the project to one bidder causes a “negative externality” to his opponents; (ii) the winner has to pay a fixed cost to implement the project; and (iii) the winner’s implementation decision is not contractible. To study the effect of such features on the seller’s expected revenue, we focus on a second-price auction based on one of four securities: (i) cash; (ii) equity; (iii) a fixed-equity hybrid; and (iv) a fixed-cash hybrid. We show that the fixed-equity hybrid generates the highest expected revenue, whereas equity generates the lowest, even though it is the instrument with the highest linkage. Absent negative externalities, equity would generate the highest expected revenue among these four securities. The revenue ranking of the instruments is robust to the information structure and the presence of insurance deposits and entry fees.

Keywords: Securities; Externalities; Moral hazard; Second-price auction (search for similar items in EconPapers)
JEL-codes: D44 D62 G32 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:118:y:2019:i:c:p:14-36

DOI: 10.1016/j.euroecorev.2019.05.003

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