Bidding with Securities: Auctions and Security Design

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. In formal security-bid auctions, the seller restricts the security design to an ordered set and uses a standard auction format (e.g., first- or second-price). In informal settings, bidders offer arbitrary securities and the seller chooses the most attractive bid, based on his beliefs, ex post. We characterize equilibrium and show that steeper securities yield higher revenues, that auction formats can be ranked based on the security design, and that informal auctions lead to the lowest possible revenues.

[1]  Robert B. Wilson.  Game-Theoretic Analysis of Trading Processes. , 1985 .

[2]  Paul R. Milgrom,et al.  A theory of auctions and competitive bidding , 1982 .

[3]  D. Duffie,et al.  A liquidity-based model of security design , 1999 .

[4]  P. DeMarzo,et al.  Portfolio Liquidation and Security Design with Private Information , 2002 .

[5]  Mark J. Garmaise.  Informed Investors and the Financing of Entrepreneurial Projects , 2001 .

[6]  Roger B. Myerson,et al.  Optimal Auction Design , 1981, Math. Oper. Res..

[7]  R. Innes.  Limited liability and incentive contracting with ex-ante action choices , 1990 .

[8]  David M. Kreps,et al.  Signaling Games and Stable Equilibria , 1987 .

[9]  Kenneth J. Martin.  The Method of Payment in Corporate Acquisitions, Investment Opportunities, and Management Ownership , 1996 .

[10]  Jill E. Fisch.  Aggregation, Auctions, and other Developments in the Selection of Lead Counsel Under the PSLRA , 2001 .

[11]  J. Sobel,et al.  Strategic stability and uniqueness in signaling games , 1990 .

[12]  John A. Weinberg,et al.  Optimal Contracts under Costly State Falsification , 1989, Journal of Political Economy.

[13]  Yeon-Koo Che,et al.  The Optimal Mechanism for Selling to a Budget-Constrained Buyer , 2000, J. Econ. Theory.

[14]  J. Mertens,et al.  ON THE STRATEGIC STABILITY OF EQUILIBRIA , 1986 .

[15]  Thomas H. Noe,et al.  Optimal Design of Securities under Asymmetric Information , 1994 .

[16]  Jeremy I. Bulow,et al.  Prices and the Winner's Curse , 1999 .

[17]  R. Hansen.  Auctions with Contingent Payments , 1985 .

[18]  R. Townsend.  Optimal contracts and competitive markets with costly state verification , 1979 .

[19]  William Vickrey,et al.  Counterspeculation, Auctions, And Competitive Sealed Tenders , 1961 .

[20]  Donald M. Topkis,et al.  Minimizing a Submodular Function on a Lattice , 1978, Oper. Res..

[21]  Bidding for Olympic broadcast rights: The competitionbefore the competition , 1991 .

[22]  Ken Binmore,et al.  The Biggest Auction Ever: the Sale of the British 3G Telecom Licenses , 2002 .

[23]  Matthew Rhodes-Kropf,et al.  Financing Auction Bids , 2004 .

[24]  E. Maskin,et al.  Optimal Auctions with Risk Averse Buyers , 1984 .

[25]  Charles Z. Zheng,et al.  High Bids and Broke Winners , 2001, J. Econ. Theory.

[26]  Matthew Rhodes-Kropf,et al.  Corporate Reorganizations and Non-Cash Auctions , 2000 .

[27]  J. Riley.  Ex Post Information in Auctions , 1988 .

[28]  Garey Ramey,et al.  D1 Signaling Equilibria with Multiple Signals and a Continuum of Types , 1996 .

[29]  M. Spiegel,et al.  Optimal Financial Contracts for a Start-Up with Unlimited Operating Discretion , 1997, Journal of Financial and Quantitative Analysis.

[30]  R. Preston McAfee,et al.  Competition for Agency Contracts , 1987 .

[31]  Jean Tirole,et al.  Auctioning Incentive Contracts , 1987, Journal of Political Economy.

[32]  Jacques Crémer,et al.  Auctions with Contingent Payments: Comment , 1987 .

[33]  R. Porter,et al.  An Empirical Study of an Auction with Asymmetric Information , 1988 .

[34]  Ulf Axelson,et al.  Security Design with Investor Private Information , 2007 .

[35]  William F. Samuelson.  Auctions with Contingent Payments: Comment , 1987 .