Security Design Under Common-Value Competition

Abstract

This paper studies bidders' security design when they compete for a commonvalue investment opportunity under dispersed information. Out of a wide range of securities, bidders oer debt nancing, the security family with the lowest information sensitivity. If the entrepreneur has superior information, bidders choose debt because a debt oer 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' oers, and a debt oer wins more often when the entrepreneur's belief is better. Second, a debt oer 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 Classication: D4

JEL Classification: D4, D44, G32