Bidding Markets with Financial Constraints

We develop a model of bidding markets with financial constraints a la Che and Gale (1998b) in which two firms optimally choose their budgets. First, we provide an alternative explanation for the dispersion of markups and “money left on the table” across procurement auctions. Interestingly, this explanation does not hinge on significant private information but on differences, both endogenous and exogenous, in the availability of financial resources. Second, we explain why the empirical analysis of the size of markups may be biased downwards or upwards with a bias positively correlated with the availability of financial resources when the researcher assumes that the data are generated by the standard auction model. Third, we show that large concentration and persistent asymmetries in market shares together with occasional leadership reversals can arise as a consequence of the firms internal financial decisions even in the absence of exogenous shocks.

Issue Date:
Jan 24 2013
Publication Type:
Working or Discussion Paper
Record Identifier:
Total Pages:
JEL Codes:
L13; D43; D44
Series Statement:
WERP 1017

 Record created 2018-04-03, last modified 2018-04-03

Download fulltext

Rate this document:

Rate this document:
(Not yet reviewed)