Debt- Versus Equity-Financing in Auction Designs
Staff General Research Papers Archive from Iowa State University, Department of Economics
A social planner wishes to launch a project but the contenders capable of running the project are cash-constrained and may default. To signal their capabilities, the contenders may finance their bids through debt or equity, depending on the mechanism chosen by the social planner. When moral hazard is absent, it is established as theorems that the ex post efficient social choice function cannot be achieved by any mechanism using only debt financing and can be achieved by a mechanism using equity financing. When moral hazard is present, however, it is illustrated heuristically that equity share discourages effort and exacerbates default more than risky debt does.
Keywords: auction; finance; debt; equity; default; financial constraint; budget constraint (search for similar items in EconPapers)
JEL-codes: D44 D92 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cta, nep-mic and nep-ppm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:isu:genres:31517
Access Statistics for this paper
More papers in Staff General Research Papers Archive from Iowa State University, Department of Economics Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070. Contact information at EDIRC.
Bibliographic data for series maintained by Curtis Balmer ().