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Security bid auctions for agency contracts

Author

Listed:
  • Byoung Heon Jun

    (Department of Economics, Korea University, Seoul, Republic of Korea)

  • Elmar G. Wolfstetter

    (Institute of Economic Theory I, Humboldt University at Berlin, Spandauer Str. 1, 10178 Berlin, Germany)

Abstract

A principal uses security bid auctions to award an incentive contract to one among several agents in the presence of hidden action and hidden information. Securities range from cash to equity and call options. “Steeper†securities are better surplus extractors that narrow the gap between the two highest valuations, yet reduce effort incentives. In view of this trade-off, a hybrid share auction that includes a (possibly negative) cash reward to the winner, a minimum share, and an option to call a fixed wage contract, tends to outperform all other auctions, although it it is not an optimal mechanism. However, by adding output targets to hybrid share auctions one can (arbitrary closely) implement the optimal mechanism.

Suggested Citation

  • Byoung Heon Jun & Elmar G. Wolfstetter, 2013. "Security bid auctions for agency contracts," Discussion Paper Series 1303, Institute of Economic Research, Korea University.
    • Handle: RePEc:iek:wpaper:1303
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    File URL: http://econ.korea.ac.kr/~ri/WorkingPapers/w1303.pdf
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    References listed on IDEAS

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    Cited by:

    1. Ding, Wei & Fan, Cuihong & Wolfstetter, Elmar G., 2013. "Horizontal mergers with synergies: Cash vs. profit-share auctions," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 382-391.
    2. Wong, Tak-Yuen & Wong, Ho-Po Crystal, 2023. "Securities auctions with pre-project information management," International Journal of Industrial Organization, Elsevier, vol. 88(C).
    3. Abhishek, Vineet & Hajek, Bruce & Williams, Steven R., 2015. "On bidding with securities: Risk aversion and positive dependence," Games and Economic Behavior, Elsevier, vol. 90(C), pages 66-80.
    4. Sun, Wuqin & Wang, Dazhong & Zhang, Yue, 2018. "Optimal profit sharing mechanisms with type-dependent outside options," Journal of Mathematical Economics, Elsevier, vol. 75(C), pages 57-66.
    5. Skrzypacz, Andrzej, 2013. "Auctions with contingent payments — An overview," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 666-675.
    6. Xun Chen & Shanmin Li & Dazhong Wang, 2022. "Optimal revenue-sharing mechanisms with seller commitment to ex-post effort," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 58(1), pages 141-159, January.

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    More about this item

    Keywords

    Auctions and security design; agency problems; mechanism design;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D45 - Microeconomics - - Market Structure, Pricing, and Design - - - Rationing; Licensing

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