Security Design Under Common-Value Competition
70 Pages Posted: 22 Nov 2022 Last revised: 20 Feb 2024
Date Written: November 8, 2022
Abstract
This paper studies bidders' security design when they compete for a common-value investment opportunity under dispersed information. Out of a wide range of securities, bidders offer debt financing, the security family with the lowest information sensitivity. If the entrepreneur has superior information, bidders choose debt because a debt offer wins more often when the project quality is higher. If the entrepreneur is uninformed, bidders' choice of debt is driven by the presence of informed competitors. First, the entrepreneur can infer about the project quality from bidders' offers, and a debt offer wins more often when the entrepreneur's belief is better. Second, a debt offer better protects a bidder against the winner's curse. The results are in stark contrast to security design by a monopolistic agent, as well as to DeMarzo, Kremer, and Skrzypacz (2005)'s result under private-value competition.
Keywords: Security design, security-bid auction, common values, private information
JEL Classification: D4, D44, G32
Suggested Citation: Suggested Citation