Experimental and theoretical essays in auctions and financial markets
Experimental and theoretical essays in auctions and financial markets
|dc.description.abstract||This dissertation deals with auctions and other, financial market mechanisms, and how they work in real life situations. Such mechanisms have been extensively studied in economics and many elegant results have been gained. These results have been also used in the design of real life auctions, competitions and financial markets. In this dissertation, I show that there are relevant facts that should influence mechanism design for practical purposes, but are omitted in the main corpus of the literature.|
One of these facts, explored in the first chapter of the dissertation, based on a single authored manuscript of this author, deals with resale possibilities. Whenever a durable good is sold, there is always a possibility that it will be resold. Even when such resale is forbidden, many imaginative ways have been found to overcome the restrictions. The possibility of resale alters many standard results regarding the efficiency of the commonly used mechanisms and their revenue ranking. While the importance of resale has been recognized early (see Milgrom 1987) there is a relative dearth of models including resale until quite recently (see the work of Philip Haile 1999, 2001, 2003). This is probably due to the widespread belief that resale possibilities are adequately covered by models with common values. However Haile (1999, 2001, 2003) has shown theoretically that this is often not true. The first chapter of the dissertation shows that resale also matters in the laboratory. Two treatments were designed and tested for this purpose. In both there is an English auction where bidders have private values. The initial auction is followed by a second stage where the winner is allowed to resell the good to the other players in an English auction with a reserve price. In one treatment, the winner can only base his reserve price on the signals the other players sent through their bids. In the other treatment however, all private values become public after the initial auction and thus the reserve price is set equal to the highest private value among all players. In both treatments, bidding your value was an equilibrium strategy, exactly as in a simple English auction without resale. The results of the experiments show that resale possibilities, do indeed influence bidding even when the theory predicts no change. We attribute this deviation to the phenomenon of noisy behavior and employ a range of bounded rationality models like a QRE and a levels of reasoning model to formally test the hypothesis. Additionally we find that the exact structure of the resale market matters, as behavior in the two resale treatments differed significantly.
In the second chapter of the dissertation, based on a paper coauthored with Rosemarie Nagel, another kind of omitted characteristic of many auctions is treated, namely toeholds. In many auctions one or many of the potential bidders already own a part of the asset that is being sold. In these cases the equilibrium strategies can be very different. In Bulow et al. (1999) the authors predict that even very small toeholds can have an explosive effect. Strong players, ie the ones with the highest toehold, bid in equilibrium much more aggressively than in the simple case without toeholds and weak players bid much less aggressively. We decided again to test this prediction in the lab and failed to find any signs of an explosive equilibrium. However, bidders behave differently with respect to normal auctions without toeholds and the size of the toeholds matters. We attribute the failure of the Nash prediction to the extreme nature of this equilibrium. Payoff functions are unusually flat, in effect bidders can deviate as much as 50% from the equilibrium strategy with only minimal losses in payoffs. Such an equilibrium is highly implausible and unstable; if bidders have even small biases towards some particular action, in many cases there is no sufficient force, in the form of pecuniary incentives, that will move them towards equilibrium.
The results of these first two chapters not only advance knowledge in the application of the auctions and mechanism design theory. The behavioral results should add to the predictive power of game theoretic models in general. It is a widely applicable observation that in games where the equilibrium payoffs are flat, real players do not necessarily play strategies predicted by theory. Additionally, the papers focus on the behavioral effect of noisy behavior and the anticipation thereof. If a small amount of noise changes the players' best responses drastically, they will tend to deviate from equilibrium in order to insure themselves from unexpected behavior on behalf of their opponents. In most real life situations such noise is to be expected. It may also be a kind of experimentation, players try a range of strategies before they settle down. Moreover, noisy communication or false interpretation of instructions -when players interact through agents- can also have an effect. A final source for such noise can be just other considerations that are treated as exogenous in these models, reasons for which players might want to deviate from equilibrium such as focal points, altruism, fairness etc
The third chapter is based on joint work with Michael Zaehringer. It proposes a mechanism to sell an asset when there are many small players who have information about the private values of other players. In concrete terms, we think of the case where there is a seller of a large asset (say a company) and some strategic buyers who want to acquire the control of the asset. We divide the value of the asset in a common value part, that stems from the cash flow and a private value part that stems from private benefits of control. The first part is common knowledge. The private values however are not known to the seller, but are known to some small informed speculators, for example investment banks. The seller's problem is then to get this information in order to appropriate more rents from the potential buyer.
A mechanism that is often proposed when selling an asset to a few strategic buyers is an auction. However, such an auction will fail to use the information of the informed speculators, who are too small to participate. A mechanism with better information aggregation properties is a sale of shares of this company through an IPO. The downside of an IPO is that it removes power from the hands of the seller. The chapter proposes a two stage mechanism that combines the strengths of these two mechanisms. In the first stage a small part of the shares is sold through an IPO and a price is formed that, as we shall see, aggregates the information of the small speculators. The seller then uses this information to design an optimal auction in the second stage and maximize his revenue when selling the rest of the asset (including the controlling rights) to the large strategic investor.
A key detail that makes the two stage mechanism work is minority shareholder protection, in the form of the sell-out rule. This rule specifies minority shareholders can force majority shareholders to buy their shares for a fair price. Because of this rule, the speculators have an incentive to buy shares in the first stage and reveal their information. Thus the paper shows that a previously unstudied result of minority shareholder protection is that speculators are induced to participate and thus add to the informational content of market prices.
|dc.title||Experimental and theoretical essays in auctions and financial markets|
|dc.type||Dissertation oder Habilitation|
|dc.publisher.name||Universitäts- und Landesbibliothek Bonn|
|ulbbnediss.affiliation.name||Rheinische Friedrich-Wilhelms-Universität Bonn|
|ulbbnediss.fakultaet||Rechts- und Staatswissenschaftliche Fakultät|
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