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Auctions Theory and Its Applications

Paper Session

Sunday, Jan. 7, 2018 1:00 PM - 3:00 PM

Marriott Philadelphia Downtown, Grand Ballroom Salon I
Hosted By: American Economic Association
  • Chair: Bo Liu, University of Electronic Science and Technology of China

A Novel Channel for Rent-seeking in IPO Auctions

Bo Liu
,
University of Electronic Science and Technology of China
Jingbin He
,
University of Electronic Science and Technology of China
Yao-Min Chiang
,
National Taiwan University

Abstract

In sharp contrast to the conventional wisdom that underwriters rely only on share allocation discretion when engaging in rent-seeking behavior in IPO book buildings (Ritter 2011), we find (for the first time in the literature) that in IPO auction without allocation discretion, rent-seeking still occurs. However, it occurs in a novel channel. Specifically, underwriters intentionally leak private information about IPO auction bidding and offer price setting and firm fundamentals to their main customers, especially valuable mutual fund customers who contribute high brokerage commission fees to underwriters’ affiliated brokerage firms. Using two unique and comprehensive proprietary account-level databases of mutual funds (their contribution of trading commission fees to individual brokerage firms and their IPO auction bidding, allocation, and post-IPO trading records in China), we find these valuable mutual funds submit orders much later in the IPO auction, bid more shares at a more accurate price, bid with less price dispersion, win a higher share allocation, and flip allocated shares with higher returns. The relationship is stronger when the contributed commission fees are greater. To maintain such a rent-seeking process, mutual funds subsequently contribute more trading commission fees to underwriters’ affiliated brokerage firms. The IPOs suffering more severe rent-seeking activities experience higher underpricing. The results reveal a novel channel for rent-seeking behavior in IPOs that has not previously been explored in the literature.

Timing of Auctions of Real Options

Lin William Cong
,
University of Chicago

Abstract

This paper endogenizes auction timing and initiation in auctions of real options. Revenue-maximizing timing deviates from welfare-maximizing or bidders' preferred timing because the information rent the seller pays makes her face a "virtual strike price" higher than the option exercise cost. The irreversible nature of time endows a seller potential control over the winning bidder's eventual option exercise. As long as she does not strongly prefer early exercise, she inefficiently delays the auction; otherwise auction timing is efficient, but option exercises are always inefficiently delayed. When the seller lacks commitment to auction timing and offer finality, bidders always initiate in equilibrium regardless of the divergence in their and the seller's preferred option exercise. The model also predicts that bidder initiation corresponds to faster option exercise, consistent with empirical evidence from the selling and drilling of oil and gas tracts.

How Efficient are Decentralized Auction Platforms?

Aaron Bodoh-Creed
,
University of California-Berkeley
Jörn Boehnke
,
Harvard University
Brent Richard Hickman
,
University of Chicago

Abstract

We provide a model of a decentralized, dynamic auction market platform (e.g., eBay) in which a large number of buyers and sellers participate in simultaneous, single-unit auctions each period. Our model accounts for the endogenous entry of agents and the impact of intertemporal optimization on bids. Solving our model with a finite number of bidders is computationally intractable due to the curse of dimensionality, so we prove that a continuum version of our model provides a good approximation of an equilibrium in the finite model. We use the approximation to estimate the structural primitives of our model using Kindle sales on eBay. We find that just over one third of Kindle auctions on eBay result in an inefficient allocation with deadweight loss amounting to 13.5% of total possible market surplus. We also find that partial centralization - for example, running half as many 2-unit, uniform price auctions each day - would eliminate a large fraction of the inefficiency, but yield lower seller revenues. Our results highlight the importance of understanding platform composition effects - selection of agents into the market - in assessing the implications of market design.
Discussant(s)
Donghang Zhang
,
University of South Carolina
Zhe Wang
,
Pennsylvania State University
Maryam Saeedi
,
Carnegie Mellon University
JEL Classifications
  • D4 - Market Structure, Pricing, and Design
  • D8 - Information, Knowledge, and Uncertainty