Securities Auctions under Moral Hazard: An Experimental Study

Shimon Kogan and John Morgan

No 2006-E23, GSIA Working Papers from Carnegie Mellon University, Tepper School of Business

Abstract: We study, both theoretically and in the lab, the performance of open outcry debt and equity auctions in the presence of both private information and hidden e¤ort in an independent private value setting. We characterize symmetric equilibrium bidding strategies and show that these lead to e¢ cient allocation. More interestingly, the revenue ranking between the debt and equity auctions depends on the returns to en- trepreneurial e¤ort. When returns are either very low or vary high, the equity auction leads to higher expected revenues to the seller than does the debt auction. When the returns to e¤ort are intermediate, we show that debt auctions can outperform equity auctions. We then test these predictions in a controlled laboratory setting and …nd broad support for the comparative predictions of the model.

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Journal Article: Securities Auctions under Moral Hazard: An Experimental Study (2010)
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