Security Design Under Common-Value Competition

70 Pages Posted: 22 Nov 2022 Last revised: 20 Feb 2024

See all articles by Yue Yuan

Yue Yuan

UCL School of Management, University College London

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

Yuan, Yue, Security Design Under Common-Value Competition (November 8, 2022). Available at SSRN: https://ssrn.com/abstract=4271432 or http://dx.doi.org/10.2139/ssrn.4271432

Yue Yuan (Contact Author)

UCL School of Management, University College London ( email )

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