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A principal-agent model of bidding firms in multi-unit auctions

Martin Bichler and Per Paulsen

Games and Economic Behavior, 2018, vol. 111, issue C, 20-40

Abstract: Principal-agent relationships between the supervisory board and the management of firms are widespread in multi-object markets such as spectrum auctions. The management aims at winning the highest valued licenses whereas the board wants to maximize profit and limits exposure. If efficiency requires multiple firms to coordinate on winning smaller sets of objects, we demonstrate that principals would do so while agents would not and inflate demand to larger sets. We first show that even if the principal has complete information about the valuations she cannot generally incentive-align the agent with only budgets constraints in first-price sealed-bid package auctions. With hidden information the principal needs to determine contingent transfers, which can be impossible with strong value-maximizing motives of the agent. Contrary, in ascending package auctions this is straightforward. The second-price payment rule of the ascending auction enables the principal to overcome the agency problem and the dynamic mechanism further facilitates coordination.

Keywords: Package auction; Equilibrium strategies; Spectrum auction; Market design (search for similar items in EconPapers)
JEL-codes: D44 D47 D82 D86 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:gamebe:v:111:y:2018:i:c:p:20-40