Defaulting in Second-Price Auctions and the Bid-Cap Solution

Speaker
David Lagziel
Date
09/06/2015 - 12:30 - 11:00Add To Calendar 2015-06-09 11:00:00 2015-06-09 12:30:00 Defaulting in Second-Price Auctions and the Bid-Cap Solution Abstract: When auctioning pricey assets, sellers face a difficulty to ensure that the winners pay the agreed price. When public projects are at stake, this also poses a problem for a larger population. In theory and in practice, the phenomenon of defaulting in auctions is usually handled either through renegotiation or through penalties. In this paper, we propose a relatively novel method of addressing this issue through bid caps. Under some assumptions on the probability to default, we show that a bid cap, an upper bound on the bids imposed by the seller, increases the expected payoff of the seller, as well as the expected payoff of the bidders (a win-win situation). We also prove that there exists a wide range of possible caps that the seller can fix and still increase the expected payoff of all the parties involved. Economics and Business Administration building (No. 504), room 011 אוניברסיטת בר-אילן - Department of Economics Economics.Dept@mail.biu.ac.il Asia/Jerusalem public
Place
Economics and Business Administration building (No. 504), room 011
Affiliation
Tel Aviv University
Abstract

Abstract: When auctioning pricey assets, sellers face a difficulty to ensure that the winners pay the agreed price. When public projects are at stake, this also poses a problem for a larger population. In theory and in practice, the phenomenon of defaulting in auctions is usually handled either through renegotiation or through penalties. In this paper, we propose a relatively novel method of addressing this issue through bid caps. Under some assumptions on the probability to default, we show that a bid cap, an upper bound on the bids imposed by the seller, increases the expected payoff of the seller, as well as the expected payoff of the bidders (a win-win situation). We also prove that there exists a wide range of possible caps that the seller can fix and still increase the expected payoff of all the parties involved.

Last Updated Date : 01/06/2015