Security Bid Auctions for Agency Contracts
Review of Economic Design 7: 443–463 (2003)
29 Pages Posted: 7 Nov 2013 Last revised: 31 Oct 2017
Date Written: October 30, 2013
A principal uses security bid auctions to award an incentive contract to one among several agents in the presence of hidden action and hidden information. Securities range from cash to equity and call options. “Steeper” securities are better surplus extractors that narrow the gap between the two highest valuations, yet reduce effort incentives. In view of this trade-off, a hybrid share auction that includes a (possibly negative) cash reward to the winner, a minimum share, and an option to call a fixed wage contract, tends to outperform all other auctions, although it is not an optimal mechanism. However, by adding output targets to hybrid share auctions one can (arbitrary closely) implement the optimal mechanism.
Keywords: auctions and security design, agency problems
JEL Classification: D21, D43, D44, D45
Suggested Citation: Suggested Citation