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Credit contracting and bidding under wealth constraints

Author

Listed:
  • Charles E. Hyde

    (Department of Economics, University of Melbourne, Parkville, 3010, AUSTRALIAand Deloitte & Touche, 225 George St, Sydney, 1217, AUSTRALIA)

  • James A. Vercammen

    (Faculties of Agricultural Sciences and Commerce & Business Administration, UBC, Vancouver,V6T 1Z2, CANADA)

Abstract

We model credit contracting and bidding in a first-price sealed-bid auction when bidder valuation and wealth are private information. An efficient separating equilibrium exists only if the wealth levels of both bidder types are sufficiently different. If not, high-valuation bidders signal by borrowing more and using less of their wealth - this is inefficient as wealth is a cheaper source of funds. An increase in the amount of borrowing required to signal does not necessarily decrease seller expected revenue. In contrast to separating equilibria, high-valuation bidders adopt pure strategy bids in pooling equilibria. Conditions are identified under which the lower bound on winning bids is higher in pooling than separating equilibria.

Suggested Citation

  • Charles E. Hyde & James A. Vercammen, 2002. "Credit contracting and bidding under wealth constraints," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 20(4), pages 703-732.
    • Handle: RePEc:spr:joecth:v:20:y:2002:i:4:p:703-732
    Note: Received: January 22, 2001; revised version: August 28, 2001
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    Citations

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    Cited by:

    1. Burkett, Justin, 2015. "Endogenous budget constraints in auctions," Journal of Economic Theory, Elsevier, vol. 158(PA), pages 1-20.
    2. Burkett, Justin, 2016. "Optimally constraining a bidder using a simple budget," Theoretical Economics, Econometric Society, vol. 11(1), January.

    More about this item

    Keywords

    Financial constraints; Auctions; Information asymmetry; Loan contracts; Credit markets.;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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