IDEAS home Printed from https://ideas.repec.org/a/ejw/journl/v8y2011i1p33-38.html
   My bibliography  Save this article

Troubling Research on Troubled Assets: Charles Zheng on the U.S. Toxic Asset Auction Plan

Author

Listed:
  • Linus Wilson

Abstract

Charles Zheng (2009) purports to model the U.S. toxic asset auction plan. In the model, “moderately poor bidders outbid rich bidders in such auctions,” because poor bidders have less to lose by defaulting on taxpayer loans. Thus, says Zheng: “After defeating their rich rivals and acquiring the toxic assets, such bidders will default on government-provided loans whenever the toxic assets turn out to be unsalvageable.” The chief trouble with the paper is that the assumptions do not fit reality. In reality, the government-provided loans used to buy toxic assets are nonrecourse, allowing the borrower to walk away from the loan with no penalties besides ceding the asset that the loan purchased. Thus, there is nothing to make rich bidders less ready to win the auction. Zheng’s conclusions that less well endowed borrowers will win toxic asset auctions are erroneous. Further Zheng’s use of auctions to model these plans is largely inappropriate since only one of the three government toxic asset plans has government backed investors bid for the same toxic asset in an auction format.

Suggested Citation

  • Linus Wilson, 2011. "Troubling Research on Troubled Assets: Charles Zheng on the U.S. Toxic Asset Auction Plan," Econ Journal Watch, Econ Journal Watch, vol. 8(1), pages 33-38, January.
    • Handle: RePEc:ejw:journl:v:8:y:2011:i:1:p:33-38
    as

    Download full text from publisher

    File URL: https://econjwatch.org/File+download/478/WilsonJanuary2011.pdf?mimetype=pdf
    Download Restriction: no
    File URL: https://econjwatch.org/703
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Zheng, Charles Z., 2001. "High Bids and Broke Winners," Journal of Economic Theory, Elsevier, vol. 100(1), pages 129-171, September.
    2. Yeon-Koo Che & Ian Gale, 1998. "Standard Auctions with Financially Constrained Bidders," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 65(1), pages 1-21.
    3. Zheng Charles Zhoucheng, 2009. "The Default-Prone U.S. Toxic Asset Auction Plan," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 9(1), pages 1-11, May.
    4. Linus Wilson & Yan Wu, 2010. "Common (stock) sense about risk-shifting and bank bailouts," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 24(1), pages 3-29, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Wilson, Linus, 2011. "A binomial model of Geithner's toxic asset plan," Journal of Economics and Business, Elsevier, vol. 63(5), pages 349-371, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bobkova, Nina, 2020. "Asymmetric budget constraints in a first-price auction," Journal of Economic Theory, Elsevier, vol. 186(C).
    2. de Frutos, Maria-Angeles & Pechlivanos, Lambros, 2006. "Second-price common-value auctions under multidimensional uncertainty," Games and Economic Behavior, Elsevier, vol. 55(1), pages 43-71, April.
    3. Zhonghao Shui, 2023. "Rejection prices and an auctioneer with non-monotonic utility," International Journal of Game Theory, Springer;Game Theory Society, vol. 52(3), pages 925-951, September.
    4. A. Talman & Zaifu Yang, 2015. "An efficient multi-item dynamic auction with budget constrained bidders," International Journal of Game Theory, Springer;Game Theory Society, vol. 44(3), pages 769-784, August.
    5. Arve, Malin, 2014. "Procurement and predation: Dynamic sourcing from financially constrained suppliers," Journal of Public Economics, Elsevier, vol. 120(C), pages 157-168.
    6. van der Laan, G. & Talman, Dolf & Yang, Z., 2018. "Equilibrium in the Assignment Market under Budget Constraints," Discussion Paper 2018-046, Tilburg University, Center for Economic Research.
    7. Quintero Jaramillo, Jose E., 2004. "Liquidity constraints and credit subsidies in auctions," DEE - Working Papers. Business Economics. WB wb040604, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
    8. Condorelli, Daniele, 2013. "Market and non-market mechanisms for the optimal allocation of scarce resources," Games and Economic Behavior, Elsevier, vol. 82(C), pages 582-591.
    9. Campo, Sandra, 2012. "Risk aversion and asymmetry in procurement auctions: Identification, estimation and application to construction procurements," Journal of Econometrics, Elsevier, vol. 168(1), pages 96-107.
    10. Gerard van der Laan & Zaifu Yang, 2016. "An ascending multi-item auction with financially constrained bidders," The Journal of Mechanism and Institution Design, Society for the Promotion of Mechanism and Institution Design, University of York, vol. 1(1), pages 109-149, December.
    11. Ottorino Chillemi & Claudio Mezzetti, 2014. "Optimal procurement mechanisms: bidding on price and damages for breach," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 55(2), pages 335-355, February.
    12. Wilson, Linus, 2011. "A binomial model of Geithner's toxic asset plan," Journal of Economics and Business, Elsevier, vol. 63(5), pages 349-371, September.
    13. Emiel Maasland & Sander Onderstal, 2006. "Going, Going, Gone! A Swift Tour of Auction Theory and its Applications," De Economist, Springer, vol. 154(2), pages 197-249, June.
    14. Burkett, Justin, 2016. "Optimally constraining a bidder using a simple budget," Theoretical Economics, Econometric Society, vol. 11(1), January.
    15. Burkett, Justin, 2015. "Endogenous budget constraints in auctions," Journal of Economic Theory, Elsevier, vol. 158(PA), pages 1-20.
    16. Marco Pagnozzi, 2007. "Bidding to lose? Auctions with resale," RAND Journal of Economics, RAND Corporation, vol. 38(4), pages 1090-1112, December.
    17. Kotowski, Maciej H., 2020. "First-price auctions with budget constraints," Theoretical Economics, Econometric Society, vol. 15(1), January.
    18. Skrzypacz, Andrzej, 2013. "Auctions with contingent payments — An overview," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 666-675.
    19. Ghosh, Gagan, 2021. "Simultaneous auctions with budgets: Equilibrium existence and characterization," Games and Economic Behavior, Elsevier, vol. 126(C), pages 75-93.
    20. Kaplan, Todd R. & Zamir, Shmuel, 2015. "Advances in Auctions," Handbook of Game Theory with Economic Applications,, Elsevier.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ejw:journl:v:8:y:2011:i:1:p:33-38. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Jason Briggeman (email available below). General contact details of provider: https://edirc.repec.org/data/edgmuus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.