Security-bid Auctions with Information Acquisition

Abstract

We study security-bid auctions in which bidders compete for an asset by bidding with securities whose payments are contingent on the asset's realized value and can covertly acquire information at some cost before participating in an auction. We first consider auctions with ordered securities in which the seller restricts the security design to an ordered set and uses a first- or second-price auction. We show that steeper securities give agents lower marginal returns to information and may yield lower revenues. We then study linear mechanisms in which payments linearly depend on the asset's realized value. We show that the revenue-maximizing linear mechanism assigns the asset efficiently. The winner pays in cash if their expected values are above a threshold and pays in stock if their expected values are below the threshold. The threshold decreases as the marginal cost of acquiring additional information increases. This result implies that stock payments are associated with lower merge synergies and lower information acquisition costs. We empirically test the implications and find consistent results.

Keywords: Information Acquisition, Securities, Auctions, Contingent Mechanisms