The Scope of Auctions in the Presence of Downstream Interactions and Information Externalities
33 Pages Posted: 9 Apr 2015
Date Written: March 30, 2015
We scrutinize the scope of auctions in the presence of downstream interactions and information externalities by using the topical example of a firm acquisition. We show that no mechanism exists that allows an investor to acquire a low-cost firm under incomplete information: a separating auction implies adverse selection and relies substantially on commitment to allocation and transfer rules. A pooling auction serves as a commitment device against ex-post opportunistic behavior and alleviates adverse selection. It can earn the investor a higher expected payoff than a separating auction, even when consistency is required as to qualify for a sequential equilibrium.
Keywords: takeover, auction, externality, incomplete information, commitment
JEL Classification: D440, D820
Suggested Citation: Suggested Citation