Auctions with Limited Liability through Default or Resale

Marco Pagnozzi and Krista Saral

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: If bidders are uncertain about their value when they participate in an auction, they may overbid and suffer ex-post losses. Limited liability mitigates these losses, and may result in more aggressive bidding and higher seller revenue, but also in an inefficient allocation. Using a combination of theory and experiment, we analyze three different forms of liability in second-price auctions: full liability, limited liability by default with varying penalties, and resale-based limited liability. With a default penalty, bids are higher than under full liability, but final revenue and efficiency are lower due to the frequency of default. Auctions with resale result in the highest revenue and allocative efficiency, and are as effective as a low default penalty in alleviating bidders’ losses. Hence, allowing resale as a form of limited liability may be preferred by both bidders and sellers over other liability rules.

Keywords: Auctions; Limited Liability; Default; Resale; Experimental Economics (search for similar items in EconPapers)
JEL-codes: C90 D44 (search for similar items in EconPapers)
Date: 2018-03-10
New Economics Papers: this item is included in nep-des, nep-gth, nep-law and nep-mic
References: View references in EconPapers View complete reference list from CitEc
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Published in Journal of Economic Behavior & Organization, 2019, vol. 159, pp. 51-74

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Related works:
Journal Article: Auctions with limited liability through default or resale (2019)
Working Paper: Auctions with limited liability through default or resale (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:sef:csefwp:494

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