Securities Auctions under Moral Hazard: An Experimental Study*

Abstract

In many settings, including venture capital …nancing, mergers and acquisitions, and lease competition, the structure of the contracts (debt versus equity) over which …rms compete di¤ers. Furthermore, the structure of the contract a¤ects the future incentives of the …rm to engage in value-creating activities by potentially diluting e¤ort or investment incentives. We study, both theoretically and in the lab, the performance of debt and equity auctions in the presence of both private information and hidden e¤ort. We show that the revenues to sellers in debt and equity auctions differ systematically depending on the returns to entrepreneurial e¤ort. We then test these revenue rankings and other predictions of the theory using controlled laboratory experiments where we vary the returns to e¤ort. While the bidding behavior, particularly in equity auctions, di¤ers from the dominant strategy prediction of the theory, the predicted revenue rankings are borne out in the lab.

Understanding auction fever: a framework for emotional bidding

“…The immediate emotion triggered by the event of winning an auction and receiving a positive monetary payoff is referred to as joy (Goeree and Offerman 2003) or love of winning (Morgan et al 2003;Kogan and Morgan 2009). Traditionally, the utility from winning an auction depends only on monetary payoffs (Vickrey 1961).…”

Security Bid Auctions for Agency Contracts

“…In a related, independent paper Kogan and Morgan (2010) also incorporate moral hazard into the security bids framework. Unlike in our analysis, in their model effort and agents' type enter in a multiplicative fashion.…”

Selling goods of unknown quality: forward versus spot auctions

“…1 These examples share three salient features: One, the seller uses an auction as a selling mechanism, two, the sale takes place so early that both the seller and the potential buyers have the same uncertainty (symmetric uncertainty) about the quality of the object, and, three, this uncertainty is resolved simultaneously for the seller and the buyers. While there is a line of literature on transactions under asymmetric uncertainty (for instance, see Lewis (2007) and Kogan and Morgan (2009)), to the best of our knowledge, there has not been any theoretical work on auctions with symmetric uncertainty. 2 This paper is a …rst attempt toward …lling this gap.…”

“…While there is a line of literature on transactions under asymmetric uncertainty (for instance, see Lewis (2007) and Kogan and Morgan (2009)), to the best of our knowledge, there has not been any theoretical work on auctions with symmetric uncertainty. 2 This paper is a …rst attempt toward …lling this gap.…”

“…Livestock and race horses are also sold after they are born. 2 In an experimental paper Phillips, Menkhaus and Krogmeier (2001) test behavior in forward and spot double auctions. Their focus, however, is on the implications of inventory costs due to advance production and not on the quality uncertainty.…”