Financing Auction Bids
Harvard Business School - Entrepreneurial Management Unit; National Bureau of Economic Research (NBER)
Duke University - Fuqua School of Business; Duke University - Department of Economics
EFA 2001 Barcelona Meetings
In many auctions, bidders do not have enough cash to pay their bid. If bidders have asymmetric cash positions and independent private values then auctions will be inefficient. However, what happens if bidders have access to financial markets? We characterize efficient auctions and show that in an efficient auction the information rent that a bidder earns depends generally on both his valuation and his cash position. In contrast a competitive capital market that is efficient must have information rents that only depend on valuation. This tension between information rents in a efficient auction and zero profits in a competitive equilibrium implies that most often, competitive financing is not efficient.
Number of Pages in PDF File: 45
JEL Classification: D44, D82, G10
Date posted: April 11, 2001