Article | RAND Journal of Economics | winter 2005

Financing Auction Bids

by Matthew Rhodes-Kropf and S. Viswanathan

Abstract

In many auctions, bidders do not have enough cash to pay their bid. If bidders have asymmetric cash positions and independent private values then auctions will be inefficient. However, what happens if bidders have access to financial markets? We characterize efficient auctions and show that in an efficient auction the information rent that a bidder earns depends generally on both his valuation and his cash position. In contrast a competitive capital market that is efficient must have information rents that only depend on valuation. This tension between information rents in an efficient auction and zero profits in a competitive equilibrium implies that most often, competitive financing is not efficient.

Keywords: Financing and Loans; Auctions; Bids and Bidding; Financial Markets; Valuation; Cash; Capital Markets; Profit; Competition;

Citation:

Rhodes-Kropf, Matthew, and S. Viswanathan. "Financing Auction Bids." RAND Journal of Economics 36, no. 4 (winter 2005): 789–815.