Post-auction investment by financially constrained bidders

Abstract

This study examines auctions in which the value of goods is endogenously determined by ex post investment while bidders face financial constraints. The main results are twofold. First, we characterize performance comparisons on revenue and investment between standard auctions. When the valuation is linear in investment, we have the equivalence theorem with respect to the seller's expected revenue and the winner's expected investment. When the valuation is concave in investment, the first-price auction yields higher expected revenue than the second-price auction. In addition, under additional conditions, the expected investment is larger in the second-price auction. Second, we analyze mechanisms other than simple auctions when sellers aim to promote investment. Scoring auctions increase the winner's investment at the expense of a decrease in revenue compared to price-only auctions.