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Bidding into the Red: A Model of Post‐Auction Bankruptcy

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  • SIMON BOARD

Abstract

This paper investigates auctions where bidders have limited liability. First, we analyze bidding behavior under different auction formats, showing that the second‐price auction induces higher prices, higher bankruptcy rates, and lower utilities than the first‐price auction. Second, we show that the cost of bankruptcy critically affects the seller's preference over the choice of auction. If bankruptcy is very costly, the seller prefers the first‐price auction over the second‐price auction. Alternatively, if the bankrupt assets are resold among the losers of the initial auction, the seller prefers the second‐price auction.

Suggested Citation

  • Simon Board, 2007. "Bidding into the Red: A Model of Post‐Auction Bankruptcy," Journal of Finance, American Finance Association, vol. 62(6), pages 2695-2723, December.
    • Handle: RePEc:bla:jfinan:v:62:y:2007:i:6:p:2695-2723
    DOI: 10.1111/j.1540-6261.2007.01290.x
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