Common-Value Auctions with Liquidity Needs: An Experimental Test of a Troubled Assets Reverse Auction

We experimentally test alternative auction designs suitable for pricing and removing troubled assets from banks’ balance sheets as part of the financial rescue. Many individual securities or pools of securities are auctioned simultaneously. Securities that are widely held are purchased in auctions for individual securities. Securities with concentrated ownership are purchased as pools of related securities. Each bank has private information about its liquidity need and the true common value of each security. We study bidding behavior and performance of sealed-bid uniform-price auctions and dynamic clock auctions. The clock and sealed-bid auctions resulted in similar prices. However, the clock auctions resulted in substantially higher bank payoffs, since the dynamic auction enabled the banks to better manage their liquidity needs. The clock auctions also reduced bidder error. The experiments demonstrated the feasibility of quickly implementing simple and effective auction designs to help resolve the crisis.Auctions, financial auctions, financial crisis

Common-Value Procurement Auctions with Renegotiation

This note contains the equilibrium bid functions for two types of common-value procurement auctions: 1) a procurement auction in which bids represent an enforceable contract; 2) a procurement auction in which, upon learning the true cost of supplying the good, the winning bidder can renegotiate the contract with the buyer, and each bidder must submit a bond with their bid, which is returned at the end of the auction unless they are the low bidder and renegotiate the contract

Seller Cheap Talk in Common Value Auctions

Sellers benefit on average from revealing information about their goods to buyers, but the incentive to exaggerate undermines the credibility of seller statements. When multiple goods are being auctioned, we show that ordinal cheap talk, which reveals a complete or partial ordering of the different goods by value, can be credible. Ordinal statements are not susceptible to exaggeration because they simultaneously reveal favorable information about some goods and unfavorable information about other goods. Any informative ordering increases revenues in accordance with the linkage principle, and the complete ordering is asymptotically revenue-equivalent to full revelation as the number of goods becomes large. These results provide a new explanation in addition to bundling, versioning, and complementarities for how a seller benefits from the sale of multiple goods.cheap talk; linkage principle; winner's curse; auctions

Licensing a common value innovation when signaling strength may backfire

This paper reconsiders the licensing of a common value innovation to a downstream duopoly, assuming a dual licensing scheme that combines a first-price license auction with royalty contracts for losers. Prior to bidding firms observe imperfect signals of the expected cost reduction; after the auction the winning bid is made public. Bidders may signal strength to their rivals through aggressive bidding, which may however backfire and mislead the innovator to set an excessively high royalty rate. We provide sufficient conditions for existence of monotone bidding strategies and for the profitability of combining auctions and royalty contracts for losers

A Naïve Bidder in a Common Value Auction

We study a common value auction in which two bidders compete for an item the value of which is a function of three independent characteristics. Each bidder observes one of these characteristics, but one of them is 'naive' in the sense that he does not realize the other bidder's signal contains useful information about the item's value. Therefore, this bidder bids as if this were an Independent Private Values auction. We show that the naive's bidder payoff exceeds that of his fully rational opponent for all symmetric unimodal signal distributions. We also show that naive bidding is persistent in the evolutionary sense.

A Common-Feature Approach for Testing Present-Value Restrictions with Financial Data

It is well known that cointegration between the level of two variables (labeled Yt and yt inthis paper) is a necessary condition to assess the empirical validity of a present-value model(PV and PVM, respectively, hereafter) linking them. The work on cointegration has been soprevalent that it is often overlooked that another necessary condition for the PVM to hold isthat the forecast error entailed by the model is orthogonal to the past. The basis of this resultis the use of rational expectations in forecasting future values of variables in the PVM. If thiscondition fails, the present-value equation will not be valid, since it will contain an additionalterm capturing the (non-zero) conditional expected value of future error terms. Our article has a few novel contributions, but two stand out. First, in testing for PVMs,we advise to split the restrictions implied by PV relationships into orthogonality conditions(or reduced rank restrictions) before additional tests on the value of parameters. We showthat PV relationships entail a weak-form common feature relationship as in Hecq, Palm, andUrbain (2006) and in Athanasopoulos, Guillén, Issler and Vahid (2011) and also a polynomialserial-correlation common feature relationship as in Cubadda and Hecq (2001), which representrestrictions on dynamic models which allow several tests for the existence of PV relationships tobe used. Because these relationships occur mostly with nancial data, we propose tests based ongeneralized method of moment (GMM) estimates, where it is straightforward to propose robusttests in the presence of heteroskedasticity. We also propose a robust Wald test developed toinvestigate the presence of reduced rank models. Their performance is evaluated in a Monte-Carlo exercise. Second, in the context of asset pricing, we propose applying a permanent-transitory (PT)decomposition based on Beveridge and Nelson (1981), which focus on extracting the long-runcomponent of asset prices, a key concept in modern nancial theory as discussed in Alvarez andJermann (2005), Hansen and Scheinkman (2009), and Nieuwerburgh, Lustig, Verdelhan (2010).Here again we can exploit the results developed in the common cycle literature to easily extractpermament and transitory components under both long and also short-run restrictions.The techniques discussed herein are applied to long span annual data on long- and short-term interest rates and on price and dividend for the U.S. economy. In both applications we donot reject the existence of a common cyclical feature vector linking these two series. Extractingthe long-run component shows the usefulness of our approach and highlights the presence ofasset-pricing bubbles.

Optimal Price Ceilings in a Common Value Auction

A simple common value auction is considered where it is optimal to set a ceiling price in addition to a reserve price. The ceiling price prevents the better informed bidder from outbidding the less informed bidders. This guarantees participation from the less informed bidders raising the seller's revenues. The seller is better off by selling the good in an auction with a price ceiling compared to selling the good at a fixed price.

Private value preturbations ad informational advantage in common value auctions

We analyze the value of being better informed than one’s rival in a two bidder, second price common value auction. In order to do so, we must pare down the continuum of equilibria that typically exists in this setting. We propose selecting an equilibrium that is robust to perturbing the common value of the object with small private value components. Under this selection, we show that having better information about the common value will frequently hurt rather than help a bidder and that the ratio of private value to common value information held by a bidder has a significant effect on the value of information

Common Value Auctions with Return Policies

This paper examines the role of return policies in common value auctions. We first characterize the unique symmetric equilibrium in first-price and second-price auctions with continuous signals and discrete common values when certain return policies are provided. We then examine how the return policies affect a seller's revenue. When the lowest common value is zero, a more generous return policy generates a higher seller's revenue; the full refund policy extracts all the surplus and therefore implements the optimal selling mechanism; given any return policy, a second-price auction generates a higher revenue than a first-price auction. In a second-price auction where the lowest common value is not zero but still smaller than the seller's reservation value, then a more generous return policy also generates a higher revenue; otherwise, the optimal return policy could be a full refund, no refund or partial refund policy.auctions, return policies, refund