Auctions with Financial Externalities

32 Pages Posted: 13 May 2003

See all articles by Emiel Maasland

Emiel Maasland

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Sander Onderstal

University of Amsterdam; Tinbergen Institute

Date Written: March 2003


We study sealed-bid auctions with financial externalities, i.e., auctions in which losers' utilities depend on how much the winner pays. In the unique symmetric equilibrium of the first-price sealed-bid auction (FPSB), larger financial externalities result in lower bids and in a lower expected revenue. The unique symmetric equilibrium of the second-price sealed-bid auction (SPSB) reveals ambiguous effects. We further show that a resale market does not have an effect on the equilibrium bids and that FPSB yields a lower expected revenue than SPSB. With a reserve price, we find an equilibrium for FPSB that involves pooling at the reserve price. For SPSB we derive a necessary and sufficient condition for the existence of a weakly separating equilibrium, and give an expression for the equilibrium.

Keywords: Auctions, Financial Externalities, Reserve Price, Resale Market

JEL Classification: D44

Suggested Citation

Maasland, Emiel and Onderstal, Sander, Auctions with Financial Externalities (March 2003). Available at SSRN: or

Emiel Maasland (Contact Author)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
+31 10 408 1513 (Phone)

Sander Onderstal

University of Amsterdam ( email )

Roetersstraat 11
Amsterdam, 1018 WB

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA