Bidding into the Red: A Model of Post-Auction Bankruptcy



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    • Board is from the Department of Economics, University of Toronto. I am indebted to Alan Beggs, Jeremy Bulow, and Paul Klemperer for their guidance, and to an anonymous referee whose comments greatly improved the paper. I would also like to thank Pat Bajari, Eiichiro Kazumori, Jon Levin, John McMillan, Rob McMillan, Meg Meyer, Paul Milgrom, Andreas Park, José Quintero, Margaret Stevens, and Bob Wilson.


This paper investigates auctions where bidders have limited liability. First, we analyze bidding behavior under different auction formats, showing that the second-price auction induces higher prices, higher bankruptcy rates, and lower utilities than the first-price auction. Second, we show that the cost of bankruptcy critically affects the seller's preference over the choice of auction. If bankruptcy is very costly, the seller prefers the first-price auction over the second-price auction. Alternatively, if the bankrupt assets are resold among the losers of the initial auction, the seller prefers the second-price auction.