Securities Auctions with Pre-Project Information Management

42 Pages Posted: 26 Sep 2016 Last revised: 13 Feb 2023

See all articles by Tak-Yuen Wong

Tak-Yuen Wong

National Tsing Hua University - Department of Quantitative Finance

Ho-Po Crystal Wong

National Tsing Hua University - Department of Economics

Date Written: January 31, 2023

Abstract

This paper analyzes securities auctions in which bidders have an option to acquire information after winning the right to develop a project. The payment consists of an up-front cash bid and a contingent security bid, which distorts investment and information acquisition relative to the first-best. We order securities in terms of their steepness: the payment of a steeper security is more sensitive to high project values. The agent's incentives to acquire information that prevents either cost overruns (Type I errors) or false cancellations (Type II errors) decrease with the steepness of securities. The optimal limited-liability securities auction involves bidding debt that minimizes the distortions in the agent's incentives to acquire performance-enhancing information. The model delivers implications on the practices commonly observed in oil lease auctions.

Keywords: Security Bid, Auction, Information Acquisition, Investment, Security Design, Oil and Gas Lease Auctions

JEL Classification: D44, D47, D81, D82, D86, G31, G34

Suggested Citation

Wong, Tak-Yuen and Wong, Ho-Po Crystal, Securities Auctions with Pre-Project Information Management (January 31, 2023). International Journal of Industrial Organization, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2843116 or http://dx.doi.org/10.2139/ssrn.2843116

Tak-Yuen Wong (Contact Author)

National Tsing Hua University - Department of Quantitative Finance ( email )

101, Section 2, Kuang-Fu Road
Hsinchu, Taiwan 300
Taiwan

HOME PAGE: http://https://sites.google.com/site/etywong110/

Ho-Po Crystal Wong

National Tsing Hua University - Department of Economics ( email )

Hsin Chu 3, Taiwan 30013
China

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