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Optimal auctions with endogenous budgets

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  • Baisa, Brian
  • Rabinovich, Stanislav

Abstract

We study the benchmark independent private value auction setting when bidders have endogenously determined budgets. Before bidding, a bidder decides how much money she will borrow. Bidders incur a cost to borrowing. We show that bidders are indifferent between participating in a first-price, second-price and all-pay auction. The all-pay auction gives higher revenue than the first-price auction, which gives higher revenue than the second price auction. In addition, when the distribution of values satisfies the monotone hazard rate condition, the revenue maximizing auction is implemented by an all-pay auction with a suitably chosen reserve price.

Suggested Citation

  • Baisa, Brian & Rabinovich, Stanislav, 2016. "Optimal auctions with endogenous budgets," Economics Letters, Elsevier, vol. 141(C), pages 162-165.
    • Handle: RePEc:eee:ecolet:v:141:y:2016:i:c:p:162-165
    DOI: 10.1016/j.econlet.2016.02.017
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Debasis Mishra & Kolagani Paramahamsa, 2018. "Selling to a naive agent with two rationales," Discussion Papers 18-03, Indian Statistical Institute, Delhi.
    2. Debasis Mishra & Kolagani Paramahamsa, 2022. "Selling to a principal and a budget-constrained agent," Discussion Papers 22-02, Indian Statistical Institute, Delhi.
    3. Sano, Ryuji, 2023. "Post-auction investment by financially constrained bidders," Journal of Economic Theory, Elsevier, vol. 213(C).
    4. Debasis Mishra & Kolagani Paramahamsa, 2022. "Selling to a principal and a budget-constrained agent," Papers 2202.10378, arXiv.org, revised Oct 2024.

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    More about this item

    Keywords

    Optimal auction; All-pay auction; Budget constraints; Liquidity;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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