empirical implications of equilibrium bidding in first price symmetric common value auctions this paper studies federal auctions for wildcat leases on the outer continental shelf from 1954 to 1970 these are leases where bidders privately acquire at some cost noisy but equally informative signals about the amount of oil and gas that may be present we develop tests of rational and equilibrium bidding in a common values model that are implemented using data on bids and ex post values we also use data on tract location and exposr values to test the comparative static prediction that bidders may bid less aggressively in common value auctions when they expect more competition we find that bidders are aware of the winner s curse and their bidding is largely consistent with equilibrium

financial contracting theory meets the real world an empirical analysis of venture capital contracts we compare the characteristics of real world financial contracts to their counterparts in financial contracting theory we do so by studying the actual contracts between venture capitalists vcs and entrepreneurs the distinguishing characteristic of vc financings is that they allow vcs to separately allocate cash flow rights board rights voting rights liquidation rights and other control rights we describe and measure these rights we then interpret our results in relation to existing financial contracting theories we also describe the interrelation and the evolution across financing rounds of the different rights query 1 query 2

updating the reserve price in common value auctions we consider a common value auction model with bidder participation determined jointly by nature and by bidder optimization in this framework an increase in the reserve price as two effects it deters marginal bidders and it deters bidders from becoming informed we then derive a test statistic for establishing when it is optimal to raise the reserve price this statistic is independent of the distribution of valuations we then apply the analysis to u s offshore oil sales and find evidence that the reserve price is dramatically too low this abstract was borrowed from another version of this item

a liquidity based model of security design we consider the problem of the design and sale of a security backed by specified assets given access to higher return investments the issuer has an incentive to raise capital by securitizing part of these assets at the time the security is issued the issuer s or underwriter s private information regarding the payoff of the security may cause illiquidity in the form of a downward sloping demand curve for the security the severity of this illiquidity depends upon the sensitivity of the value of the issued security to the issuer s private information thus the security design problem involves a tradeoff between the retention cost of holding cash flows not included in the security design and the liquidity cost of including the cash flows and making the security design more sensitive to the issuer s private information we characterize the optimal security design in several cases we also demonstrate circumstances under which standard debt is optimal and show that the riskiness of the debt is increasing in the issuer s retention costs for assets

auctions with contingent payments there now exists a host of results concerning the revenue performance of various auction methods this note delves deeper into auction markets by examining the effects on sellers revenue of certain noncash means of payment the basic result that bidding mediums which include some contingent pricing feature generally yield the seller more revenue than do cash bids is intriguing by itself and also points out the limitations of received theory since what follows builds on the independent preferences framework it is useful to first note the assumptions of that model and the major results pertaining to it to model an auction in the independent preferences tradition one assumes that bidders have reservation values vi that are known only privately and that can be depicted as being drawn independently from some distribution f v the most important result for this model is the revenue equivalence theorem as given in john riley and william samuelson 1981 any auction involving risk neutral bidders for which the following four conditions hold a a buyer can make any bid above some minimum reserve price b the buyer making the highest bid is awarded the object c the auction rules are anonymous and d there is a common equilibrium bidding strategy in which each buyer makes a bid bi which is a strictly increasing function of his reservation value vi yields an expected revenue of

contracts between art and commerce have had trouble mobilizing a set of economic tools suited to understand ing such issues as why these industries are organized as they are and what consequences public policies hold for them however some useful tools have recently emerged from the theory of contracts the basic structural characteristics of creative industries their technologies of production and consumption fiercely resist governance by anything approaching a complete contract yet they have evolved distinctive and serviceable contract forms that seem to differ from deal making patterns prevalent in other sectors great works of art may speak for themselves as connoisseurs declare but they do not lead self sufncient lives the inspirations of talented artists reach consumers hands eyes ears only with the aid of other inputs humdrum inputs that respond to ordinary economic incentives the visual artist needs a gallery to display and promote works to potential purchasers the author requires a publisher the pop musician a record label a symphony orchestra or dance company wants a hall and someone to market the tickets the hollywood movie the broadway play the tv sitcom each demands a diverse group of creative talents as well as a set of humdrum inputs the question of how contracts work between art and commerce thus is nested within the larger question of why artists and humdrum inputs choose to structure their relationships as they do it turns out that the organization of the arts and entertainment industries depends heavily on the contracts that link creative and humdrum agents these

time to build and aggregate fluctuations some new evidence this paper presents maximum likelihood estimates and tests of a model similar to one kydland and prescott 1982 suggested for this purpose it derives equilibrium laws of motion for a set of aggregate variables as functions of the model s parameters and the innovation to the technology shock the paper shows that a single unobservable index can explain the variability in the observed series but identifying the single index with the innovation to the technology shock implies that per capita hours is not well explained it also shows that time separable preferences with respect to leisure are consistent with the data copyright 1989 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

the impact of imf programs on asset values abstract this paper provides evidence on the effectiveness of the imf by examining the impact of its program on wealth we analyze all imf press releases about forthcoming aid for 16 emerging countries during the period 1989 1999 together with references in the financial times to possible imf support using event study methodology we measure the impact of these announcements on the prices of a number of assets including equities currencies domestic and foreign bank stocks and sovereign debt our findings suggest that neither the imf announcements nor the ft news have a measurable effect on asset values the exceptions are the announcements in the ft that suggest imf support is less likely to be forthcoming in these cases we observe negative abnormal returns

competition among auctioneers in large markets we analyse a multistage game of competition among auctioneers first the auctioneers commit to some reserve prices second the bidders enter one auction if any and finally the auctions take place we show that for any finite set of feasible reserve prices each auctioneer announces a reserve price equal to his production cost if the numbers of auctioneers and bidders are sufficiently large though finite our result supports the idea that optimal auctions may be quite simple our model also confirms previous results for some limit versions of the model by mcafee econometrica 61 1993 1281 1312 peters rev econ stud 64 1997 97 123 and peters and severinov j econ theory 75 1997 141 179

a method for taking models to the data abstract this paper develops a method for combining the power of a dynamic stochastic general equilibrium model with the flexibility of a vector autoregressive time series model to obtain a hybrid that can be taken directly to the data it estimates this hybrid model via maximum likelihood and uses the results to address a number of issues concerning the ability of a prototypical real business cycle model to explain movements in aggregate output and employment in the postwar us economy the stability of the real business cycle model s structural parameters and the performance of the hybrid model s out of sample forecasts

surplus extraction and competition a competitive economy is studied in which sellers offer alternative direct mechanisms to buyers who have correlated private information about their valuations in contrast to the monopoly case where sellers charge entry fees and extract all buyers surplus it is shown that in the unique symmetric equilibrium with competition sellers hold second price auctions with reserve prices set equal to their cost most important it is a best reply for sellers not to charge entry fees of the kind normally used to extract surplus even though it is feasible for them to do so

bidding securities in projects with negative externalities abstract we analyze the allocation of an indivisible project in a security bid auction in which i the allocation of the project to one bidder causes a negative externality to his opponents ii the winner has to pay a fixed cost to implement the project and iii the winner s implementation decision is not contractible to study the effect of such features on the seller s expected revenue we focus on a second price auction based on one of four securities i cash ii equity iii a fixed equity hybrid and iv a fixed cash hybrid we show that the fixed equity hybrid generates the highest expected revenue whereas equity generates the lowest even though it is the instrument with the highest linkage absent negative externalities equity would generate the highest expected revenue among these four securities the revenue ranking of the instruments is robust to the information structure and the presence of insurance deposits and entry fees

unique equilibrium in a model of self fulfilling currency attacks even though self fulfilling currency attacks lead to multiple equilibria when fundamentals are common knowledge we demonstrate the uniqueness of equilibrium when speculators face a small amount of noise in their signals about the fundamentals this unique equilibrium depends not only on the fundamentals but also on financial variables such as the quantity of hot money in circulation and the costs of speculative trading in contrast to multiple equilibrium models our model allows analysis of policy proposals directed at curtailing currency attacks

imperfect competition in auction designs we study the competition between two owners of identical goods who wish to sell them to a pool of potential buyers the sellers compete simultaneously setting reserve prices for their second price sealed bid auctions upon observing the set reserve prices the buyers decide simultaneously in which auction to bid we show that this game has at least one equilibrium and that all equilibria are inefficient reserve prices are not driven to zero cost we also discuss where and why the parallel between optimal auction design and optimal pricing in the case of monopoly breaks down for oligopoly

an empirical study of an auction with asymmetric information this paper examines federal auctions for drain age leases on the outer continental shelf from 1959 to 1969 these are leases that are adjacent to tracts on which a deposit has been discovered the authors find that the data strongly support the hypotheses that neighbor firms are better informed about the value of a lease than nonneighbor firms that neighbor firms coordinate their bidding decisions and that both types of firms bid strategically in accordance with the bayesian nash equilibrium model for first price sealed bid auctions with asymmetric information

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

competition and the medium of exchange in takeovers the role of the medium of exchange in competition among bidders and its effect on returns to stockholders in corporate takeovers are investigated consistent with recent empirical evidence our model shows that stockholders of both acquiring and target firms obtain higher returns when a takeover is financed with cash rather than equity and that returns to target shareholders increase with competition the model predicts that the fraction of synergy captured by the target decreases with the level of synergy finally it is shown that as competition increases the cash component of the offer as well as the proportion of cash offered increases article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

mechanism design by competing sellers a dynamic model with many sellers and buyers is constructed agents failing to trade may trade in the next period an equilibrium is found where sellers hold identical auctions and buyers randomize over the sellers they visit the distribution of buyer valuations is endogenous an auction with efficient reserve is an optimal mechanism from each seller s point of view in spite of the ability of any seller to alter the distribution of buyer types participating in the seller s mechanism by altering the mechanism copyright 1993 by the econometric society

tobin s q and the gains from takeovers this paper analyzes the relation between takeover gains and the q ratios of targets and bidders for a sample of 704 mergers and tender offers over the period 1972 1987 target bidder and total returns are larger when targets have low q ratios and bidders have high q ratios the relation is strengthened after controlling for the characteristics of the offer and the contest this evidence confirms the results of the work by lang stulz and walkling and shows that their findings also hold for mergers and after controlling for other determinants of takeover gains in a recent paper lang stulz and walkling lsw 1989 document that the abnormal returns in tender offers are related to the tobin s q ratios of the targets and the bidders in particular they find that target bidder and total returns are higher when takeover targets have high q ratios and bidders have low q ratios where one is used as a cutoff point to separate high q firms from low q firms in fact bidders with high q ratios have significant positive abnormal returns when they engage in a takeover while bidders with low q ratios have significant negative abnormal returns the best takeovers in terms of value creation are those where a high q firm takes over a low q firm the opposite scenario holds for the worst case takeovers low q firms taking over high q firms if q is interpreted as a measure of managerial performance these findings imply that better performing firms also make better acquisitions and that more value can be created from taking over poorly performing companies while the results of lsw are insightful they leave a number of questions unanswered their sample consists only of tender offers several studies have documented that the returns to targets in mergers are smaller than those in tender offers see jensen and ruback 1983 and huang and walkling 1987 it would therefore be useful to see whether the lsw 1989 results hold for a larger sample which includes both mergers and tender offers previous research has also shown that the characteristics of the takeover hostile versus friendly and single versus multiple bidder the form of payment cash versus securities the time period before 1968 1968 1980 1981 and later and the relative size of target and bidder are important determinants of the magnitude of takeover gains and their distribution

imf conditionality as a screening device a theoretical model is developed in which adoption of an imf programme signals a country s productivity it is assumed that there are two types of country one with a high return on investment and the other with a low return the country s type is known only to itself in the presence of a debt overhang the high productivity country may choose not to undertake the investment despite it being socially efficient to do so in this case the creditor would like to offer the country some debt reduction but the low productivity type will also benefit from the debt reduction this problem can be avoided if the country has sufficient resources to engage in a debt buyback in order to gain the debt relief only the high productivity type would be prepared to sacrifice current resources for the debt reduction and thus a separation of the types is achieved this is similar to an argument found in acharya and diwan 1993 we argue however that it is unlikely that a heavily indebted country will have sufficient resources for a buyback if the country is credit constrained an alternative screening mechanism is to undertake an imf programme in return for debt reduction and possibly an imf loan this mechanism can be the equilibrium outcome even if the programme creates only disutility for the country s policy makers

optimal equity auctions with heterogeneous bidders abstract i analyze the effects of heterogeneity in terms of bidders valuation distributions and standalone values in equity auctions auctions in which bidders offer equities rather than cash heterogeneity misaligns equity bids face values monetary values and bidder types making the seller s revenues sensitive to the auction design given heterogeneity i identify the mechanism that maximizes the expected revenue among all incentive compatible mechanisms of equity auctions i show how different sources of heterogeneity alter the optimal design revenues and allocational efficiency unlike optimal cash auctions myerson 1981 where bidders standalone values are irrelevant the allocation of optimal equity auctions favors bidders with lower standalone values because the seller can extract a larger proportion of their rents by contrast when bidders differ only in valuation distributions optimal equity auctions feature more efficient allocations than optimal cash auctions

ex post information in auctions assumptions maskin and riley 1984 show that when the amount a buyer is willing to pay for the auctioned object is not independent of his wealth expected revenue tends to be lower under open bidding in contrast milgrom and weber 1982 relax the assumption that valuations are independent and assume instead that buyers private estimates of the item s value are affiliated a buyer with a high estimate then tends to believe that other buyers will have higher estimates as well maintaining the other assumptions milgrom and weber show that expected revenue is higher in the open ascending bid auction the intuition behind this result is that in sealed high bid auctions a buyer s bid is determined not only by his own beliefs but via their bids by the beliefs of those with lower estimates a buyer with a low estimate believes that others are more likely to have low estimates as well he therefore bids less aggressively it follows that a buyer can beat all opponents who have lower estimates with a bid which is lower than it would be if beliefs were independent 2 milgrom and weber also show that if the seller purchases and then publicly reveals information which is positively linked to buyers valuations this also raises expected gross revenue from an auction the intuition here is that this helps to reduce the difference in bidders willingness to pay 3 that such a reduction should raise expected revenue is easily understood for the limiting case in which the seller s information includes all the buyers private information for then all buyer asymmetry is eliminated and so expected buyer profit is bid away to zero the seller therefore reaps the entire surplus in the following pages the implications of correlated signals are further explored while milgrom and weber emphasized the potential gains to a seller who reveals information ex ante the focus here is on ex post information in section 2 it is shown that under weak assumptions the sealed high bid auction is dominated by any auction

auctions with contingent payments an overview i survey a literature on auctions with contingent payments that is auctions in which payments are allowed to depend on an ex post verifiable variable such as revenues in oil lease auctions based on demarzo et al 2005 i describe a partial ranking of auction revenues for auctions that differ in terms of contract forms pricing rules and seller commitment and why the revenue equivalence theorem does not apply even in an independent private values setup i discuss models that incorporate adverse selection moral hazard competition between auctioneers common values and the sale of multiple units

corporate takeover bids methods of payment and bidding firms stock returns this study explores the role of the method of payment in explaining common stock returns of bidding firms at the announcement of takeover bids the results reveal significant differences in the abnormal returns between common stock exchanges and cash offers the results are independent of the type of takeover bid i e merger or tender offer and of bid outcomes these findings supported by analysis of nonconvertible bonds are attributed mainly to signalling effects and imply that the inconclusive evidence of earlier studies on takeovers may be due to their failure to control for the method of payment recent studies on corporate takeovers provide inconclusive results on the valuation effects of acquisitions on the common stock of bidding firms 1 substantial differences are reported between the studies that analyze acquisitions initiated as tender offers and those that confine their samples to merger proposals the existence of mixed empirical findings for the bidding firms makes it difficult to interpret existing evidence and to draw conclusions about the managers acquisition motivations nevertheless the reason for the substantial difference between empirical findings on mergers and tender offers still remains an unresolved issue it is observed however that mergers are usually common stock exchange offers whereas tender offers are usually cash offers given that different methods of financing a project have different signalling implications myers and majluf 39 the differential stock returns of bidders in mergers and tender offers may be due to the method of acquisition financing

competition among sellers who offer auctions instead of prices abstract in this paper we study a large market in which sellers compete by offering auctions to buyers instead of simple fixed price contracts two variants of the model are studied one extends a model first analyzed by wolinsky rev econ stud 55 1988 71 84 in which buyers learn their valuations only after meeting sellers the other variant extends the model of mcafee econometrica61 1993 1281 1312 in which buyers know their valuations before they choose among available auctions the equilibrium array of auctions is characterized for each case and the efficiency properties of the equilibria are analyzed journal of economic literatureclassification numbers d41 d44 d82

inefficient sorting under output sharing abstract i study sorting in a frictional market asset owners post their terms then workers direct their search when the owners switch from prices to shares the competition between workers is handicapped the unique equilibrium features inefficient positive assortative matching the queue lengths are distorted even though the hosios efficiency condition holds for every pair of types for any distribution of types all workers pair up with better assets the best workers suffer while the weakest workers gain the opposite occurs on the asset side competition drives the asset owners to post flatter contracts it leads to constrained efficiency whenever prices are feasible otherwise handicapped competition results in inefficient sorting

auctions of companies robert g hansen auctions of companies are conducted in ways that contradict received auction theory the major puzzles are 1 sellers restrict the number of bidders 2 sellers restrict the number of bidders 3 bidders are screened by an initial round of nonbinding bids and 4 bidders offer and sellers sometimes accept preemptive bids puzzles 1 2 and 4 are explained by assuming that some information concerning the company can if released reduce the value of the company puzzle 3 is explained as a way for sellers to select the highest valued bidders equilibrium is maintained by using the initial bids to set a reserve price for the final bidding round jel d44 d82 g34 i introduction from 1989 to 1998 19 593 private companies were reported to be bought and sold in the united states many through an auction process the total value of these transactions was in excess of 315 billion 1 in addition from 1989 to 1998 there were 13 134 reported divestitures of divisions subsidiaries or product lines the value of these transactions was in excess of 900 billion perhaps not surprisingly an industry of advisors auctioneers exists to facilitate these transactions and the institutional framework by which auctions of companies are conducted has become somewhat standardized the purpose of this article is to apply auction theory to explain this standardized institutional framework the article proceeds as follows section ii describes the standardized process used for selling private companies or divisions of public companies points out how these practices conflict with certain aspects of received auction theory and presents initial arguments that explain the rationality of the practic es in section iii a more formal model is developed to show how some of the standard corporate auction practices can be explained section iv deals with what may be the most intriguing institutional practice the use of preliminary nonbinding indications of interest section v concludes the article with a preliminary discussion of entry fees and preemptive bidding ii the typical auction process and consistency with auction theory the typical process for selling a private company or division of a public company runs as follows 2 upon making the decision to sell the selling company will retain or will already have retained an advisor who will serve as de facto auctioneer the auctioneer drawing on knowledge of the selling company will draw up a preliminary list of potential bidders this list will probably include competitors suppliers customers and acquisition oriented conglomerates or leveraged buyout houses the advisor will also exercise his judgment at this time as to whether or not a prospective bidder will be willing and able to complete a transaction at a satisfactory price if a negative judgment is made that potential bidder will likely be excluded from further participation the remaining prospective bidders will receive a very cursory description of the selling company and will be offered a more in depth offering memorandum if they sign a confidentiality agreement although the first cursory description may no t even include the selling company s name the offering memorandum will be quite detailed including the sort of information that would typically be in a public corporation s securities and exchange commission 10k filing as well as traditionally confidential information on current issues at the selling company overview of costs plans for market and product developments and so on the next step is for the prospective bidders to submit preliminary nonbinding indications of interest for the selling company these indications will be either a number or a range of numbers that are supposed to represent bidders first approximations of their estimates of the value of the target 3 the preliminary indications are then used by the auctioneer to further reduce the number of bidders who will proceed further only the top bidders on their list are permitted to go forward 4 although the screening is clearly not as straightforward as the preceding passage presumes there is no doubt that the likelihood of ad mittance to the next round increases with the preliminary bid even though that bid is nonbinding

efficient entry in competing auctions in this paper we consider the efficiency of seller entry into a large market in which sellers post and commit to terms of trade and buyers then allocate themselves across sellers buyers differ in their valuations for the good being sold in this mar ket and sellers are heterogeneous with respect to their reservation values in this environment a second price auction is a simple mechanism which allows the buyers who interact with a particular seller to compete for that seller s good the competing auctions literature e g mcafee 1993 and peters and severinov 1997 considers the characteristics of these auctions as the market gets large and it is now well understood that competition leads each seller to post an efficient mechanism e g a second price auction with reserve price equal to seller reservation value the implications of a large market for seller entry are less well understood in this environment when goods are auctioned buyers extract an information rent from sellers one might therefore expect that the equilibrium level of seller entry into the market would be below the level that a social planner would choose there is however a counterbalancing force namely that when a seller enters the market that seller steals buyers from the sellers who were already there and so potentially reduces the surpluses associated with these sellers our main result is that in a large market when sellers are free to choose their preferred mechanisms these two effects information rent versus business stealing exactly offset each other leading to the socially efficient level of seller entry in addition we show that the equilibrium and social planner allocation of buyers across seller types coincide the model we present is one of competitive search sellers compete for buyers by posting and committing to selling mechanisms and buyers direct their search based on these posted mechanisms moen 1997 and shimer 1996 demonstrate the efficiency of entry in a model of competitive search that has two special features first meetings between buyers and sellers are one on one that is each seller interacts with at most one buyer second there is complete information in the sense that once

costly auction entry royalty payments and the optimality of asymmetric designs abstract 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

rational and self fulfilling balance of payments crises speculative attacks on a pegged exchange rate must sometimes occur ifasset price paths are to be free of abnormal profit opportunities suchattacks are fully rational as they reflect the market s response to aregime breakdown that is inevitable the authors shows that under someexpectations about policy balance of payments crises can also be purely self fulfilling events in such cases even a permanently viableregime may collapse and the economy will possess multiple equilibriacorresponding to different subjective assessments of the probability ofa crisis the behavior of the domestic interest rate will naturally reflect the possibility of a speculative attack copyright 1986 by american economic association

competition among sellers in securities auctions we study simultaneous security bid second price auctions with com petition among sellers for potential bidders the sellers compete by designing ordered sets of securities that the bidders can offer as payment for the assets upon observing auction designs potential bidders decide which auctions to enter we characterize all symmet ric equilibria and show that there always exist equilibria in which auctions are in standard securities or their combinations in large markets the unique equilibrium is auctions in pure cash we extend the model for competition in reserve prices and show that binding reserve prices never constitute equilibrium as long as equilibrium security designs are not call options jel d44 d82 g10 in economic and financial markets rights to control and exploit assets with the potential to generate cash flows are often sold through auctions while in some auc tions the winner s future profits from the asset cannot be used as a basis for payment so only cash bids are possible in many cases it is possible to observe and verify the ex post cash flows this means that bidders can submit their bids in the form of securities the values of which are contingent on future cash flows from the asset securities auctions are common in the real world examples include government sales of oil leases lead plaintiff wireless spectrum and highway building auctions many other transactions though not formally auctions are similar to securities auc tions in nature examples include corporate takeovers intercorporate asset sales book publishing advertising and venture capital markets 1 in this paper we analyze equilibrium auction mechanisms when sellers compete for potential bidders by altering security designs of their auctions rather than reserve prices as in the prior literature specifically we consider an environment in which

bidding with securities auctions and security design we study security bid auctions in which bidders compete for an asset by bidding with securities that is they offer payments that are contingent on the realized value of the asset being sold the value depends on investment by the winner thus creating the possibility of moral hazard such auctions are commonly used both formally and informally in formal auctions the seller generally restricts bids to an ordered set such as an equity share or royalty rate by restricting the bids standard auction formats such as first and second price auctions can be used in informal settings with competing buyers the seller does not commit to a mechanism upfront rather bidders offer securities and the seller chooses the most attractive bid based on his beliefs ex post we characterize equilibrium payoffs and bidding strategies in this setting and show that an informal mechanism yields the lowest possible revenues across all mechanisms we also determine the optimal formal mechanism and show that the security design is more important than the auction format we show that the revenue equivalence principle that expected revenues are independent of the auction format holds if the set of permissible securities is ordered and convex such as equity otherwise it need not hold for example when bidders offer standard debt securities a second price auction is superior on the other hand if bidders compete on the conversion ratio of convertible debt a first price auction yields higher revenues finally we examine how different forms of moral hazard impact our results

the mode of acquisition in takeovers taxes and asymmetric information we develop a model in which the mode of acquisition conveys information concerning the value of the bidder the model incorporates the possibility that offers containing both cash and stock can be made in a setting consistent with the u s tax code we demonstrate that bidders with unfavorable private information about their equity value choose offers containing some stock to avoid the capital gains tax consequences of cash offers the model yields a number of unique predictions about the construction of acquisition offers we present evidence consistent with the model when one firm acquires another it can pay for the acquisition with cash stock or a combination of the two recent studies find that announcement returns to bidding firms who make cash offers are higher than when stock offers are made models consistent with this evidence note that as in myers and majluf 1984 a bidder with private information about the value of its assets only offers stock when its shares are overvalued by target shareholders recognizing this adverse selection target shareholders reduce their estimate of the bidder s value thus without some benefit in stock over cash as a means of payment a lemons problem arises for stock offers and bidders only choose cash offers our paper advances the use of stock in an offer through its tax advantages in the united states to realize the benefits available in nontaxable offers an offer must contain at least fifty percent stock thus when the bidder has private information about the value of its assets stock off6rs can still occur because of their tax advantage the intuition is as follows target holders can postpone the realization of capital gains when they receive stock in a takeover so other things equal they demand higher prices in cash takeovers while the offer of stock may have tax advantages the shares swapped are valued by the target as if they were offered by the average bidder making a stock offer thus a pool of higher private valuation bidder types choose cash offers in spite of the tax consequences a pool of lower private valuation types

sequential sales learning and cascades when ipo shares are sold sequentially later potential investors can learn from the purchasing decisions of earlier investors this can lead rapidly to cascades in which subsequent investors optimally ignore their private information and imitate earlier investors although rationing in this situation gives rise to a winner s curse it is irrelevant the model predicts that 1 offerings succeed or fail rapidly 2 demand can be so elastic that even risk neutral issuers underprice to completely avoid failure 3 issuers with good inside information can price their shares so high that they sometimes fail 4 an underwriter may want to reduce the communication among investors by spreading the selling effort over a more segmented market consider a scenario in which an issuer is selling a new security of uncertain value for example an ipo initial public offering of stock or high yield debt through an underwriter the s e c has banned variable price sales while the value of this new security is highly uncertain to individual market participants investors hold perfectly accurate information when aggregated moreover there are many potential investors and a small number of these investors can jointly determine the value of the firm or its project with high precision it would seem that in this scenario underpriced offerings would succeed and overpriced offerings would fail nevertheless this paper shows that if the distribution channels of invest ment banks are limited underpriced offerings can fail and overpriced offer ings can succeed with limited distribution channels it takes the under writer time to approach interested investors therefore later investors can observe how well an offering has sold to date or at least how successful it has sold relative to offerings previously undertaken by this underwriter

optimal equity auctions with two dimensional types abstract we analyze the design and performance of equity auctions when bidder s valuations and opportunity costs are private information distributed according to an arbitrary joint density that can differ across bidders we identify for any incentive compatible mechanism an equivalent single dimensional representation for uncertainty we then characterize the revenue maximizing and surplus maximizing equity mechanisms and compare revenues in optimal equity and cash auctions unlike in cash auctions the adverse selection arising from bidders two dimensional types in equity auctions can lead to a global violation of the regularity condition which represents a maximal mismatch between incentive compatibility and maximization of revenue or surplus such mismatch can lead a seller to exclude bidders and demand a bidder specific stake from a non excluded bidder providing insights into when a firm should employ an auction and when it should just negotiate with a single bidder

high bids and broke winners abstract this paper analyzes auctions where budget constrained bidders have options to declare bankruptcy it predicts a bidding equilibrium that changes discontinuously in a borrowing rate available to bidders when the borrowing rate is above a threshold high budget bidders win and the likelihood of bankruptcy is low when the borrowing rate is below the threshold the winner is the most budget constrained bidder and is most likely to declare bankruptcy this result explains the high bids and broke winners anomaly in the c block fcc spectrum auction based on its equilibrium analysis the paper proves that a seller can profit from offering to finance the highest bidder at a below market interest rate even with default risk journal of economic literature classification numbers d44 d45 d82 g33 l96

a competitive distribution of auctions in this paper a competitive distribution of auctions is described for an economy consisting of an infinite number of buyers and sellers all of whom differ according to their valuation for the single indivisible object being traded a competitive distribution of auctions is such that no seller can improve his profits by deviating to any alternative direct mechanism it is shown that the competitive distribution of auctions will have the property that each buyer and seller s best reply is independent of his beliefs about the tastes of other buyers and sellers on the market the purpose of this paper is to provide an equilibrium for an economy in which sellers compete by offering different direct mechanisms to buyers no attempt is made to give a complete characterization of all possible equilibria rather we focus on one equilibrium in which the contracts that are offered by sellers in equilibrium and buyer s behaviour under these contracts are both independent of traders beliefs about one another the equilibrium illustrates one of the reasons why contracts that are employed in practice may not be as finely tuned to beliefs as the theory of mechanism design says that they should be the answer is simply that contracts are not offered in a vacuum sellers in the model studied in this paper need to compete with one another in order to attract buyers highly tuned mechanisms tend to extract buyer surplus in such an environment sellers are able to attract many buyers by offering to use cruder mechanisms that leave some surplus for buyers in this paper sellers are allowed to have different costs for the commodity that is being traded nonetheless the equilibrium for the limit economy in which there are infinitely many buyers and sellers is such that every seller offers a second price auction and publicizes a reserve price equal to his cost in a standard monopoly auction the optimal reserve price for the seller exceeds his cost by an amount that depends on his beliefs about buyers valuations myerson 1981 a seller who raises his reserve price has his profits affected in two distinct ways by raising his reserve price the seller makes it unprofitable for some buyer types to participate in his auction the seller therefore loses any surplus that he might have earned by trading with these buyers the buyers who still find it profitable to participate in the seller s auction will end up having to pay a higher price when they win because of this increase in the seller s reserve price this means that the seller will be able to extract a bit more surplus from buyers who continue to participate the seller raises the reserve price until the marginal cost associated with raising the reserve price is just equal to the marginal gain associated with the ability to extract more surplus from remaining buyers competition mitigates this argument since there is a limit to the amount of surplus that the seller can extract from remaining buyers before they decide that they should instead choose one of the alternative auctions that are being held on the market with

debt and seniority an analysis of the role of hard claims in constraining management we argue that long term debt has a role in controlling management s ability to finance future investments a company with high widely held debt will find it hard to raise capital since new security holders will have low priority relative to existing creditors conversely for a company with low debt we show there is an optimal debt equity ratio and mix of senior and junior debt if management undertakes unprofitable as well as profitable investments we derive conditions under which equity and a single class of senior long term debt work as well as more complex contracts for controlling investment behavior

optimal design of securities under asymmetric information a firm must decide what security to sell to raise external capital to finance a profitable investment opportunity there is ex ante asymmetry of information regarding the probability distribution of cash flow generated by the investment in this setting we derive necessary and sufficient conditions for a security to be optimal uniquely optimal that is for pooling at this security to be an the unique equilibrium outcome using these conditions we show that the debt contract is uniquely optimal if and only if cash flows are ordered by strict conditional stochastic dominance finally we derive an equivalence relationship between optimal security designs and designs that minimize mispricing