Saral, Krista Jabs (2009): An Analysis of Market-Based and Statutory Limited Liability in Second Price Auctions.
Download (317kB) | Preview
In auctions where bidders are uncertain of their value and are fully liable for their bids, there exists the potential for losses if bids exceed realized values. Theoretically, bids will be higher if bidders are able to mitigate this downside loss through some form of limited liability. To determine the impact of differing forms of limited liability, this paper theoretically and experimentally examines a second price auction with uncertain private values in three environments: market-based limited liability, statutory limited liability, and full liability. Market-based limited liability is induced through inter-bidder resale following the auction. Statutory limited liability is created through a default penalty option in the event that a bidder would make a loss. Bids are theoretically shown to be higher under resale and the penalty default environments than under full liability. The experimental results confirm more aggressive bidding for resale and the low penalty default treatments, but not by as much as theory predicts. Notably, under the high default penalty bidders are not bidding significantly more than under full liability, despite the theoretical prediction that they should.
|Item Type:||MPRA Paper|
|Original Title:||An Analysis of Market-Based and Statutory Limited Liability in Second Price Auctions|
|Keywords:||Auctions, Limited Liability, Resale, Experimental Economics|
|Subjects:||D - Microeconomics > D4 - Market Structure, Pricing, and Design > D44 - Auctions
C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C90 - General
|Depositing User:||Krista Jabs Saral|
|Date Deposited:||20. Sep 2010 02:38|
|Last Modified:||12. Feb 2013 01:56|
1.Board, Simon. (2007). "Bidding into the Red: A Model of Post-Auction Bankruptcy," Journal of Finance,vol. 62(6), 2695-2723.
2.Cooper, D.J., and Fang, H. (2008). "Understanding Overbidding in Second Price Auctions: An Experimental Study," The Economic Journal, vol. 118 (532),1572 - 1595.
3.Coppinger, V.M., V.L. Smith, and J.A. Titus (1980) "Incentives and Behavior in English, Dutch and Sealed-bid Auctions," Economic Inquiry 43, 1-22.
4.Cox, James, Smith, Vernon, Walker, James. (1988) "Theory and Individual Behavior of First-Price Auctions,"Journal of Risk and Uncertainty, Springer, vol. 1(1),61-99.
5.Lange, Andreas, John A. List, and Michael K. Price (2004). "Auctions with Resale When Private Values Are Uncertain: Theory and Empirical Evidence," NBER Working Papers 10639, National Bureau of Economic Research, Inc.
6.Fischbacher, U. (2007). "Z-Tree: Zurich Toolbox For Readymade Economic Experiments," Experimental Economics 10 (2), 171--178.
7.Ghent, Andra C., and Kudlyak, Marianna (2009) "Recourse and Residential Mortgage Default: Theory and Evidence from U.S. States," Federal Reserve Bank of Richmond Working Paper 09-10, July.
8.Haile, Philip A. (2003) "Auctions with Private Uncertainty and Resale Opportunities," Journal of Economic Theory 108, 72-110.
9.Hansen, R.G. and Lott, J.R. (1991) "The Winner's Curse and Public Information in Common Value Auctions: Comment," American Economic Review,81, 347--361.
10.Holt, C. and S. Laury (2002) "Risk Aversion and Incentive Effects," American Economic Review 92 (5), 1644-1655.
11.Kagel, J.H. and Levin, D. (1986) "The Winner's Curse and Public Information in Common Value Auctions," American Economic Review, 76, 894--920.
12.Kagel, J.H. and Levin, D. (1991) "The Winner's Curse and Public Information in Common Value Auctions: Reply," American Economic Review, 81, 362--369.
13.Kagel, J.H., R.M. Harstad, and D. Levin (1987), "Information Impact and Allocation Rules in Auctions with Affiliated Private Values: A Laboratory Study," Econometrica 55, 1275-1304.
14.Katok, Elena and Salmon, Timothy (2009) "Response of Risky Choice to Variance Reduction," Working Paper.
15.Pagnozzi, M. (2008) "Bidding to Lose? Auctions with Resale," RAND Journal of Economics, 38(4), 1090-1112, Winter 2007.
16.Roelofs, Matthew (2002) "Common Value Auctions with Default: An Experimental Approach," Experimental Economics Springer, vol. 5(3), pages 233-252.
17.Salmon, Timothy (2004) "Spectrum Auctions by the United States Federal Communications Commission," Auctioning Public Assets: Analysis and Alternatives, M.C.W. Janssen (Ed.), Cambridge University Press, ISBN 0521830591.
18.Saral, K. (2009) "Speculation and Demand Reduction in an English Clock Auction with Resale," Working Paper.
19.Waehrer, K. (1995) "A Model of Auction Contracts with Liquidated Damages," Journal of Economic Theory, 67(2), 531-555.
20.Zheng, C. (2001) "High Bids and Broke Winners," Journal of Economic Theory, 100(1), 129-171.