Working Paper Series, Department Economics, Swedish University of Agricultural Sciences
Luca Di Corato
Selling real assets: the impact of idiosyncratic project risk in an auction environment
() and Michele Moretto
Abstract: Consider a seller auctioning a real asset among n agents.
Each agent contemplates a specific investment project and the asset is
crucial for its activation. Project cash flows and their volatility are
private information. A first-price auction is considered and the asset is
granted in exchange for a payment to be paid at the investment time. Here
we determine the optimal bid function and show that the auction is
efficient. The asset is assigned to the project characterized by the
highest volatility in the associated cash flows. Interestingly, the bid
does not depend on the time at which the project is actually executed or on
the changes in post-auction cash flows. We also address concerns about the
distribution of the project value among the parties and show that i) the
winner always holds the largest share of the ex-post project value when
projects are characterized by sufficiently high cash flow volatility and
ii) negative systematic risk reduces, ceteris paribus, the share accruing
to the seller. Finally, we show that cash flow volatility has an ambiguous
effect on losses due to the presence of information asymmetry.
Keywords: first-price auctions; procurement; idiosyncratic risk; adverse selection; moral hazard; continuous-time models; (follow links to similar papers)
JEL-Codes: C61; D44; D82; (follow links to similar papers)
40 pages, August 29, 2016
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