Auctions with limited liability through default or resale

Marco Pagnozzi (1) , Krista Saral (2, 3)

1 University of Naples Federico II = Università degli studi di Napoli Federico II
2 Webster - Webster University Geneva
3 GATE Lyon Saint-Étienne - Groupe d'Analyse et de Théorie Economique Lyon - Saint-Etienne

If bidders are uncertain about their value when they participate in an auction, they may overbid and suffer ex-post losses. Limited liability mitigates these losses, and may result in more aggressive bidding and higher seller revenue, but also in an inefficient allocation. Using a combination of theory and experiment, we analyze three different forms of liability in second-price auctions: full liability, limited liability by default with varying penalties, and resale-based limited liability. With a default penalty, bids are higher than under full liability, but final revenue and efficiency are lower due to the frequency of default. Auctions with resale result in the highest revenue and allocative efficiency, and are as effective as a low default penalty in alleviating bidders' losses. Hence, allowing resale as a form of limited liability may be preferred by both bidders and sellers over other liability rules

Mots clés: Auctions Limited liability Default Resale Experimental economics

Domaines: Economies et finances

Marco Pagnozzi, Krista Saral. Auctions with limited liability through default or resale. Journal of Economic Behavior and Organization, 2019, 159, pp.51-74. ⟨10.1016/j.jebo.2019.01.011⟩. ⟨halshs-02010914⟩