A Model of Auction Contracts with Liquidated Damages

Waehrer, Keith

doi:10.1006/jeth.1995.1084

Cited by 64 publications

(44 citation statements)

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“…5 Default in auctions has received only limited theoretical attention, in models with homogeneous bidders. Waehrer (1995) studies the effect on seller revenue of requiring buyers to post deposits which are forfeit in the event of default. In a common-values setting, Harstad and Rothkopf (1995) show that allowing bid withdrawal (perhaps with the payment of a penalty) can enhance seller revenue.…”

Section: Introductionmentioning

confidence: 99%

Reputation in Auctions: Theory, and Evidence from eBay

Houser

Wooders

2006

Economics Manag Strategy

547

347

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Employing a procedure suggested by a simple theoretical model of auctions in which bidders and sellers have observable and heterogenous reputations for default, we examine the effect of reputation on price in a data set drawn from the online auction site eBay. Our main empirical result is that seller, but not bidder, reputation has an economically and statistically significant effect on price.JEL codes: C51, D44, D82, L86 * We thank Sam Allen for research assistance with the data. Andrew Ching and Diego Moreno provided useful thoughts on early drafts of this paper. We are grateful to two anonymous referees and the coeditor for helpful comments.

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Section: Introductionmentioning

confidence: 99%

Reputation in Auctions: Theory, and Evidence from eBay

Houser

Wooders

2006

Economics Manag Strategy

547

347

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“…The problems of limited liability and default risk have recently also been discussed in the literature on standard (\forward") auctions. Waehrer (1995) analyzes a model with default risk where the winning bidder has an opportunity to cancel the transaction and pay prespeci¯ed damages to the seller. Limited liability is modeled by this security deposit chosen by the seller and -in contrast to our model -is identical for all bidders.…”

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confidence: 99%

Wild Bids. Gambling for Resurrection in Procurement Contracts

Calveras

Ganuza

Hauk

2004

Journal of Regulatory Economics

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This paper analyzes the problem of abnormally low tenders in the procurement process. Limited liability causes¯rms in a bad¯nancial situation to bid more aggressively than nancially healthy¯rms in the procurement auction. Therefore, it is likely that the winning¯rm is a¯rm in¯nancial di±culties with a high risk of bankruptcy. The paper focuses on the regulatory practice of surety bonds to face this problem. We show that the use of surety bonds reduces and sometimes eliminates the problem of abnormally low tenders. We provide a characterization of the optimal surety bond and show that the US practice of requiring that surety bonds cover over 100% of the contract price can be excessive, implying overinsurance to the problem of abnormally low tenders.

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“…Spulber (1990) shows that when the penalty is sufficiently low, bidders pool by bidding the highest possible value for the contract and defaulting unless the highest value is realized. Waehrer (1995) also demonstrates that a low default penalty results in more aggressive bidding and a greater likelihood of default but goes on to show that the associated loss to the seller can be reduced via renegotiation. In contrast, Harstad and Rothkopf (1995) argue that when opportunities for renegotiation are available, a low default penalty leads to less aggressive behavior as bidders' attention moves away from winning the contract in the initial round and toward obtaining the contract at a lower price in the renegotiation stage.…”

Section: Introductionmentioning

confidence: 93%

The Value of Information in Auctions with Default Risk

Lamping

2007

SSRN Journal

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After the close of an auction, the winning bidder may find that he is unable to carry out his bid offer. This paper seeks to determine what measures the seller should take to maximize his share of the surplus when bidders are privately informed about their risk of default. Special attention is paid to the effect of imposing a default penalty, the value of gathering information about each bidder's default risk, and the role of commitment.It is shown that the value of gathering information is negligible when the seller has commitment power and negative when the seller lacks commitment power. When the seller observes each bidder's risk, the seller benefits from the ability to commit. However, when the seller does not observe each bidder's risk, he is able to capture nearly all the surplus independent of whether or not he has commitment power.

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A Model of Auction Contracts with Liquidated Damages

Cited by 64 publications

References 0 publications

Reputation in Auctions: Theory, and Evidence from eBay

Reputation in Auctions: Theory, and Evidence from eBay

Wild Bids. Gambling for Resurrection in Procurement Contracts

The Value of Information in Auctions with Default Risk

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