Auctions of Real Options

51 Pages Posted: 26 Aug 2012 Last revised: 16 Jun 2019

See all articles by Lin William Cong

Lin William Cong

Cornell University - Samuel Curtis Johnson Graduate School of Management; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: June 2019


Governments and corporations frequently auction assets with embedded real options using both cash and contingent bids. I characterize equilibrium bidding and option exercise strategies, and find that the moral hazard associated with uncontractible investment timing inefficiently and asymmetrically accelerates or delays investments. I use a mechanism design approach instead of the conventional"steepness'" concept to rank securities and derive the optimal security. Furthermore, without sellers' commitment to the security design, as seen in informal auctions such as corporate acquisitions, all auction equilibria are equivalent to cash auctions, and investments are socially efficient. The results are broadly consistent with empirical observations, for example in the sales of oil leases.

Keywords: Auctions; Acquisitions; Oil and Gas; Real Options; Security Design; Timing Games.

JEL Classification: D44; D81; D82; G13; G31; G32; L24

Suggested Citation

Cong, Lin, Auctions of Real Options (June 2019). Available at SSRN: or

Lin Cong (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States


National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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