Timing of Auctions of Real Options

44 Pages Posted: 9 Sep 2012 Last revised: 8 Feb 2019

See all articles by Lin William Cong

Lin William Cong

University of Chicago - Booth School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: December 2018

Abstract

This paper endogenizes auction timing and initiation in auctions of real options. Because bidders have information rent, a seller faces a "virtual strike price" higher than the actual exercise cost. She inefficiently delays the auction to encourage bidder participation and utilizes the irreversible nature of time to gain partial control over option exercises. The seller's private benefit at option exercise may restore efficient auction timing, but option exercises are always inefficiently late. When she lacks commitment to auction timing, bidders always initiate in equilibrium, resulting in earlier option exercise and higher welfare than auctions proscribing bidder initiation. Overall, auction timing modifies the distribution of the bidder valuations and has important impact on bidding strategies, auction design, and real outcomes.

Keywords: Auctions; Dynamic Game; Initiation; Optimal Stopping; Real Options; Mechanism Design; M\&A

JEL Classification: D21; D23; D44; D82; L26

Suggested Citation

Cong, Lin, Timing of Auctions of Real Options (December 2018). Available at SSRN: https://ssrn.com/abstract=2143929 or http://dx.doi.org/10.2139/ssrn.2143929

Lin Cong (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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