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Bidding into the Red: A Model of Post‐Auction Bankruptcy
Author(s) -
BOARD SIMON
Publication year - 2007
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2007.01290.x
Subject(s) - dutch auction , bankruptcy , revenue equivalence , auction theory , multiunit auction , english auction , eauction , vickrey auction , microeconomics , reverse auction , generalized second price auction , common value auction , bidding , vickrey–clarke–groves auction , economics , proxy bid , business , finance
This paper investigates auctions where bidders have limited liability. First, we analyze bidding behavior under different auction formats, showing that the second‐price auction induces higher prices, higher bankruptcy rates, and lower utilities than the first‐price auction. Second, we show that the cost of bankruptcy critically affects the seller's preference over the choice of auction. If bankruptcy is very costly, the seller prefers the first‐price auction over the second‐price auction. Alternatively, if the bankrupt assets are resold among the losers of the initial auction, the seller prefers the second‐price auction.