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The Value of Information in Auctions with Default Risk

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  • Lamping, Jennifer

Abstract

After the close of an auction, the winning bidder may find that he is unable to carry out his bid offer. This paper seeks to determine what measures the seller should take to maximize his share of the surplus when bidders are privately informed about their risk of default. Special attention is paid to the effect of imposing a default penalty, the value of gathering information about each bidder's default risk, and the role of commitment. It is shown that the value of gathering information is negligible when the seller has commitment power and negative when the seller lacks commitment power. When the seller is informed about each bidder's risk, the seller benefits from the ability to commit. However, when the seller is uninformed, he is able to capture nearly all the surplus independent of whether or not he has commitment power.

Suggested Citation

  • Lamping, Jennifer, 2007. "The Value of Information in Auctions with Default Risk," MPRA Paper 24375, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:24375
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    References listed on IDEAS

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    Cited by:

    1. Mordechai E. Schwarz, 2021. "Auctions with endogenous opting‐out fees and recursive winning procedures from the Talmud," International Journal of Economic Theory, The International Society for Economic Theory, vol. 17(4), pages 345-374, December.

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    More about this item

    Keywords

    Asymmetries; Auctions; Auction Theory; Bidding; Information Revelation; Signaling;
    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
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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