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A principal-agent model of bidding firms in multi-unit auctions

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  • Bichler, Martin
  • Paulsen, Per

Abstract

Principal-agent relationships between the supervisory board and the management of firms are widespread in multi-object markets such as spectrum auctions. The management aims at winning the highest valued licenses whereas the board wants to maximize profit and limits exposure. If efficiency requires multiple firms to coordinate on winning smaller sets of objects, we demonstrate that principals would do so while agents would not and inflate demand to larger sets. We first show that even if the principal has complete information about the valuations she cannot generally incentive-align the agent with only budgets constraints in first-price sealed-bid package auctions. With hidden information the principal needs to determine contingent transfers, which can be impossible with strong value-maximizing motives of the agent. Contrary, in ascending package auctions this is straightforward. The second-price payment rule of the ascending auction enables the principal to overcome the agency problem and the dynamic mechanism further facilitates coordination.

Suggested Citation

  • Bichler, Martin & Paulsen, Per, 2018. "A principal-agent model of bidding firms in multi-unit auctions," Games and Economic Behavior, Elsevier, vol. 111(C), pages 20-40.
    • Handle: RePEc:eee:gamebe:v:111:y:2018:i:c:p:20-40
    DOI: 10.1016/j.geb.2018.06.002
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    Cited by:

    1. Guichen Gao & Xinxin Han & Li Ning & Hing-Fung Ting & Yong Zhang, 2022. "Principal–agent problem under the linear contract," Journal of Combinatorial Optimization, Springer, vol. 44(4), pages 2286-2301, November.
    2. Martin Bichler & Paul Milgrom & Gregor Schwarz, 2023. "Taming the Communication and Computation Complexity of Combinatorial Auctions: The FUEL Bid Language," Management Science, INFORMS, vol. 69(4), pages 2217-2238, April.

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    More about this item

    Keywords

    Package auction; Equilibrium strategies; Spectrum auction; Market design;
    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
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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