FEEM working papers "Note di lavoro" series
2003 .030

Auctions with Financial Externalities


Authors: Emiel Maasland, Sander Onderstal
Series: Economy and Society
Editor: Fausto Panunzi
Type: Journal
Keywords: Auctions,financial externalities,reserve price,resale market
JEL n.: D44
JEL: forthcoming in Economic Theory

Abstract

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

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