The Optimal Design of First-Price Auctions with Financial Constraints and Default Risks

C.Z. Zheng

Working Papers from Minnesota - Center for Economic Research

Abstract: If the bidders in an auction have financial constraints, how should the seller design the auction to maximize his profit? An observed practice is that the seller offers a loan, or interest subsidy, to the highest bidder. The work by Che and Gale [3] has given a partial answer for second-price auctions, with default risk assumed away. This paper provides a complete solution for first-price auctions, with default risk included. For each level of the interest subsidy, we solve the auction game and give a closed form solution for its symmetric equilibrium.

Keywords: AUCTIONS; RISK (search for similar items in EconPapers)
JEL-codes: D44 (search for similar items in EconPapers)
Pages: 63 pages
Date: 1997
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Persistent link: https://EconPapers.repec.org/RePEc:fth:minner:301

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