Credit contracting and bidding under wealth constraints

Charles E. Hyde () and James A. Vercammen
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Charles E. Hyde: Department of Economics, University of Melbourne, Parkville, 3010, AUSTRALIAand Deloitte & Touche, 225 George St, Sydney, 1217, AUSTRALIA
James A. Vercammen: Faculties of Agricultural Sciences and Commerce & Business Administration, UBC, Vancouver,V6T 1Z2, CANADA

Economic Theory, 2002, vol. 20, issue 4, 703-732

Abstract: We model credit contracting and bidding in a first-price sealed-bid auction when bidder valuation and wealth are private information. An efficient separating equilibrium exists only if the wealth levels of both bidder types are sufficiently different. If not, high-valuation bidders signal by borrowing more and using less of their wealth - this is inefficient as wealth is a cheaper source of funds. An increase in the amount of borrowing required to signal does not necessarily decrease seller expected revenue. In contrast to separating equilibria, high-valuation bidders adopt pure strategy bids in pooling equilibria. Conditions are identified under which the lower bound on winning bids is higher in pooling than separating equilibria.

Keywords: Financial constraints; Auctions; Information asymmetry; Loan contracts; Credit markets. (search for similar items in EconPapers)
JEL-codes: D44 D82 G20 (search for similar items in EconPapers)
Date: 2002-03-21
Note: Received: January 22, 2001; revised version: August 28, 2001
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