IDEAS home Printed from https://ideas.repec.org/p/wrk/warwec/1516.html
   My bibliography  Save this paper

Auctioning control and cash-flow rights separately

Author

Listed:
  • Liu, Tingjun

    (The University of Hong Kong)

  • Bernhardt, Dan

    (University of Illinois & University of Warwick)

Abstract

We consider a classical auction setting in which an asset/project is sold to buyers who privately receive signals about expected payoffs, and payoffs are more sensitive to the signal of the bidder who controls the asset. We show that a seller can increase revenues by sometimes allocating cash-flow rights and control to different bidders, e.g., with the highest bidder receiving cash flows and the second-highest receiving control. Separation reduces a bidder’s information rent, which depends on the importance of his private information for the value of his awarded cash flows. As project payoffs are most sensitive to the information of the bidder who controls the project, allocating cash flow to another bidder lowers bidders’ informational advantage. As a result, when signals are close, the seller can increase revenues by splitting rights between the top two bidders.

Suggested Citation

  • Liu, Tingjun & Bernhardt, Dan, 2024. "Auctioning control and cash-flow rights separately," The Warwick Economics Research Paper Series (TWERPS) 1516, University of Warwick, Department of Economics.
    • Handle: RePEc:wrk:warwec:1516
    as

    Download full text from publisher

    File URL: https://warwick.ac.uk/fac/soc/economics/research/workingpapers/2024/twerp_1516_-_bernhardt.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Kim-Sau Chung & J.C. Ely, 2007. "Foundations of Dominant-Strategy Mechanisms," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 74(2), pages 447-476.
    2. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-1158, December.
    3. Mehmet Ekmekci & Nenad Kos & Rakesh Vohra, 2016. "Just Enough or All: Selling a Firm," American Economic Journal: Microeconomics, American Economic Association, vol. 8(3), pages 223-256, August.
    4. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    5. Dirk Bergemann & Xianwen Shi & Juuso Valimaki, 2009. "Information Acquisition in Interdependent Value Actions," Journal of the European Economic Association, MIT Press, vol. 7(1), pages 61-89, March.
    6. Mehmet Ekmekci & Nenad Kos, 2016. "Information in Tender Offers With a Large Shareholder," Econometrica, Econometric Society, vol. 84, pages 87-139, January.
    7. Benjamin Brooks & Songzi Du, 2021. "Optimal Auction Design With Common Values: An Informationally Robust Approach," Econometrica, Econometric Society, vol. 89(3), pages 1313-1360, May.
    8. McAfee, R Preston & McMillan, John & Reny, Philip J, 1989. "Extracting the Surplus in the Common-Value Auction," Econometrica, Econometric Society, vol. 57(6), pages 1451-1459, November.
    9. Dirk Bergemann & Benjamin Brooks & Stephen Morris, 2016. "Informationally Robust Optimal Auction Design," Cowles Foundation Discussion Papers 2065, Cowles Foundation for Research in Economics, Yale University.
    10. Dirk Bergemann & Stephen Morris, 2012. "An Ascending Auction for Interdependent Values: Uniqueness and Robustness to Strategic Uncertainty," World Scientific Book Chapters, in: Robust Mechanism Design The Role of Private Information and Higher Order Beliefs, chapter 7, pages 253-262, World Scientific Publishing Co. Pte. Ltd..
    11. Alexander S. Gorbenko & Andrey Malenko, 2011. "Competition among Sellers in Securities Auctions," American Economic Review, American Economic Association, vol. 101(5), pages 1806-1841, August.
    12. Claudio Mezzetti, 2004. "Mechanism Design with Interdependent Valuations: Efficiency," Econometrica, Econometric Society, vol. 72(5), pages 1617-1626, September.
    13. Stephan Lauermann & Andre Speit, 2023. "Bidding in Common‐Value Auctions With an Unknown Number of Competitors," Econometrica, Econometric Society, vol. 91(2), pages 493-527, March.
    Full references (including those not matched with items on IDEAS)

    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. Schmitz, Patrick W., 2010. "Contractual solutions to hold-up problems with quality uncertainty and unobservable investments," Journal of Mathematical Economics, Elsevier, vol. 46(5), pages 807-816, September.
    2. Wanchang Zhang, 2022. "Robust Private Supply of a Public Good," Papers 2201.00923, arXiv.org, revised Jan 2022.
    3. He, Wei & Li, Jiangtao, 2022. "Correlation-robust auction design," Journal of Economic Theory, Elsevier, vol. 200(C).
    4. Simon Loertscher & Leslie M. Marx, 2022. "Incomplete Information Bargaining with Applications to Mergers, Investment, and Vertical Integration," American Economic Review, American Economic Association, vol. 112(2), pages 616-649, February.
    5. Kaplow, Louis & Shapiro, Carl, 2007. "Antitrust," Handbook of Law and Economics, in: A. Mitchell Polinsky & Steven Shavell (ed.), Handbook of Law and Economics, edition 1, volume 2, chapter 15, pages 1073-1225, Elsevier.
    6. Cécile Cézanne, 2012. "Berle and Means," Chapters, in: Michael Dietrich & Jackie Krafft (ed.), Handbook on the Economics and Theory of the Firm, chapter 7, Edward Elgar Publishing.
    7. Scott Gehlbach & Konstantin Sonin & Ekaterina Zhuravskaya, 2010. "Businessman Candidates," American Journal of Political Science, John Wiley & Sons, vol. 54(3), pages 718-736, July.
    8. Peter G. Klein & Michael E. Sykuta, 2010. "Editors’ Introduction," Chapters, in: Peter G. Klein & Michael E. Sykuta (ed.), The Elgar Companion to Transaction Cost Economics, chapter 1, Edward Elgar Publishing.
    9. Schmid, Andreas, 2007. "Incentive Compatibility and Efficiency in the contractual Insurer-Provider Relationship: Economic Theory and practical Implications: The Case of North Carolina," MPRA Paper 23311, University Library of Munich, Germany, revised 2008.
    10. Surajeet Chakravarty & W. Bentley MacLeod, 2006. "Construction Contracts (or “How to Get the Right Building at the Right Price?”)," CESifo Working Paper Series 1714, CESifo.
    11. Oliver Hart, 2013. "Noncontractible Investments and Reference Points," Games, MDPI, vol. 4(3), pages 1-20, August.
    12. Schmitz, Patrick W., 2021. "On the optimality of outsourcing when vertical integration can mitigate information asymmetries," Economics Letters, Elsevier, vol. 202(C).
    13. Dermot Leahy & Catia Montagna, 2006. "'Make-or-Buy' in International Oligopoly and the Role of Competitive Pressure," Dundee Discussion Papers in Economics 197, Economic Studies, University of Dundee.
    14. Arti Grover, 2008. "Vertical FDI versus Outsourcing: A Welfare Comparison from the Perspective of the Host Country," DEGIT Conference Papers c013_009, DEGIT, Dynamics, Economic Growth, and International Trade.
    15. Nathan H. Miller, 2008. "Competition When Consumers Value Firm Scope," EAG Discussions Papers 200807, Department of Justice, Antitrust Division.
    16. Carpenter, Jeffrey P. & Bowles, Samuel & Gintis, Herbert, 2006. "Mutual Monitoring in Teams: Theory and Experimental Evidence on the Importance of Reciprocity," IZA Discussion Papers 2106, Institute of Labor Economics (IZA).
    17. Patrick W. Schmitz, 2006. "Book Review," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 162(3), pages 535-542, September.
    18. Andrei Hagiu & Julian Wright, 2015. "Marketplace or Reseller?," Management Science, INFORMS, vol. 61(1), pages 184-203, January.
    19. Markus Solf, 2004. "Unternehmenskooperationen als Folge von Informations- und Kommunikations-technologieveränderungen: Eine theoretische Analyse," Schmalenbach Journal of Business Research, Springer, vol. 56(2), pages 146-167, March.
    20. Christopher Hansman & Jonas Hjort & Gianmarco León-Ciliotta & Matthieu Teachout, 2020. "Vertical Integration, Supplier Behavior, and Quality Upgrading among Exporters," Journal of Political Economy, University of Chicago Press, vol. 128(9), pages 3570-3625.

    More about this item

    Keywords

    Control and cash flow rights ; separation of rights ; mechanism design ; interdependent valuations JEL Codes: D44 ; D82;
    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    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:wrk:warwec:1516. 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: Margaret Nash (email available below). General contact details of provider: https://edirc.repec.org/data/dewaruk.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.