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High Bids and Broke Winners

Charles Zheng

Staff General Research Papers Archive from Iowa State University, Department of Economics

Abstract: 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 モhigh bids and broke winnersヤ 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.

Date: 2001-09-01
New Economics Papers: this item is included in nep-exp and nep-fmk
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Published in Journal of Economic Theory, September 2001, vol. 100 no. 1, pp. 129-171

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Persistent link: https://EconPapers.repec.org/RePEc:isu:genres:12665

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