Three essays in economics and finance

This dissertation consists of three essays. The first essay is joint work with Dan Bernhardt. We endogenize entry to a security-bid auction, where participation is costly, and bidders must decide given their private valuations whether to participate. We first suppose that the minimum reserve security-bid yields the seller an expected revenue equal to the asset's stand-alone value to the seller. Demarzo et al. (2005) establish that with a fixed number of bidders, auctions with steeper securities yield the seller more revenues. Counterintuitively, we find that auctions with steeper securities also attract more entry, further enhancing the revenues from such auctions. We then establish that with optimal reserve securities, auctions with steeper securities always yield higher expected revenues. In the second essay, I consider a situation in which a winning bidder of an equity auction has an investment opportunity after the auction and the seller has private information about the return of the post-auction investment. I show that in such a situation, in contrast to the seminal "linkage principle" by Milgrom and Weber (1982), the seller's expected revenue may be higher when not disclosing her private information at all than when committing to publicly announce her private information regardless of whether it is positive or negative. The third essay is joint work with Keiichi Kawai. The securitization of structured finance products entails three types of inefficiency: the issuer's moral hazard when screening underlying assets (ex-ante inefficiency), the issuer's incentive to repackage underlying assets into separate securities even when doing so is socially inefficient (interim inefficiency), and adverse selection in the market (ex-post inefficiency). To analyze the interplay of these inefficiencies and their welfare implications, we consider a situation wherein buying medium-value assets and issuing medium-value securities are first-best. However, we show that the issuer not only buys low-value underlying assets but also repackages underlying assets to issue two types of securities of different values despite paying a socially wasteful cost

Endogenous entry to security-bid auctions

We endogenize entry to a security-bid auction, where participation is costly and bidders must decide given their private valuations whether to participate. We first consider any minimum reserve security-bid of a fixed expected value that weakly exceeds the asset's value when retained by the seller. DeMarzo, Kremer, and Skrzypacz (2005) establish that with a fixed number of bidders, auctions with steeper securities yield the seller more revenues. Counterintuitively, we find that auctions with steeper securities also attract more entry, further enhancing the revenues from such auctions. We then establish that with optimal reserve securities, auctions with steeper securities always yield higher expected revenues

Costly auction entry, royalty payments, and the optimality of asymmetric designs

We analyze optimal auction mechanisms when bidders base costly entry decisions on their valuations, and bidders pay with a fixed royalty rate plus cash. With sufficient valuation uncertainty relative to entry costs, the optimal mechanism features asymmetry so that bidders enter with strictly positive but different (ex-ante) probabilities. When bidders are ex-ante identical, higher royalty rates—which tie payments more closely to bidder valuations—increase the optimal degree of asymmetry in auction design, further raising revenues. When bidders differ ex-ante in entry costs, the seller favors the low cost entrant; whereas when bidders have different valuation distributions, the seller favors the weaker bidder if entry costs are low, but not if they are high. Higher royalty rates cause the seller to favor the weaker bidder by less, and the strong bidder by more

Optimal Product Placement

We model a market, such as an online software market, in which an intermediary connects sellers and buyers by displaying sellers’ products. With two vertically-differentiated products, an intermediary can place either: (1) one product, not necessarily the better one, on the first page, and the other hidden on the second page; or (2) both products on the first page. We show that it can be optimal for the intermediary to obfuscate a product—possibly the better one—since this weakens price competition and allows the sellers to extract a greater surplus from buyers; however, it is not socially optimal. The choice of which one to obfuscate depends on the distribution of search costs

Costly auction entry, royalty payments, and the optimality of asymmetric designs

We analyze optimal auction mechanisms when bidders base costly entry decisions on their valuations, and bidders pay with a fixed royalty rate plus cash. With sufficient valuation uncertainty relative to entry costs, the optimal mechanism features asymmetry so that bidders enter with strictly positive but different (ex-ante) probabilities. When bidders are ex-ante identical, higher royalty rates—which tie payments more closely to bidder valuations—increase the optimal degree of asymmetry in auction design, further raising revenues. When bidders differ ex-ante in entry costs, the seller favors the low cost entrant; whereas when bidders have different valuation distributions, the seller favors the weaker bidder if entry costs are low, but not if they are high. Higher royalty rates cause the seller to favor the weaker bidder by less, and the strong bidder by more