High Bids and Broke Winners
Staff General Research Papers Archive from Iowa State University, Department of Economics
This paper analyzes auctions where budget-constrained bidders have options to declare bankruptcy. It predicts a bidding equilibrium that changes is continuously in a borrowing rate available to bidders. When the borrowing rate is above a threshold, high-budget bidders win, and the likelihood of bankruptcy is low. When the borrowing rate is below the threshold, the winner is the most budget-constrained bidder and is most likely to declare bankruptcy. This result explains the ï¾“high bids and broke winnersï¾” anomaly in the C-Block FCC spectrum auction. Based on its equilibrium analysis, the paper proves that a seller can profit from offering to finance the highest bidder at a below-market interest rate, even with default risk.
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Published in Journal of Economic Theory, September 2001, vol. 100 no. 1, pp. 129-171
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Journal Article: High Bids and Broke Winners (2001)
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Persistent link: https://EconPapers.repec.org/RePEc:isu:genres:12665
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