Abstract
I analyze the design of equity security-bid auctions in the presence of heterogeneity in terms of bidder sizes and distributions of synergy gains. Such heterogeneity complicates the selection of the winning bid and directly impacts the seller's revenues. Given bidder heterogeneity, I identify the optimal mechanism that maximizes the seller's expected revenues among all incentive-compatible mechanisms. I show how bidder heterogeneity affects the optimal auction design, and obtain the distinct implications of different sources of bidder heterogeneity. The allocation in the optimal mechanism favors smaller bidders, because the seller can extract larger proportions of rents. My work generalizes optimal cash auctions to equity auctions and provides new insights into the functioning of security-bid auctions.
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