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Liquidity constraints and credit subsidies in auctions

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  • Quintero Jaramillo, Jose E.

Abstract

I consider an auction with participants that differ in valuation and access to liquid assets. Assuming credit is costly (e.g. due to moral hazard considerations) different auction rules establish different ways of screening valuation-liquidity pairs. The paper shows that standard auction forms result in different allocation rules. When the seller can deny access to capital markets or offer credit subsidies, she gains an additional tool to screen agents. The paper derives conditions under which the seller increases profits by way of subsidizing loans. In particular, in a second price auction, the seller always benefits from offering small subsidies. The result extends to a non-auction setting to show that a monopolist may use credit subsidies as a price discrimination device.

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  • 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.
    • Handle: RePEc:cte:wbrepe:wb040604
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    Cited by:

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    2. 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.

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