Common-Value Fixed Equity Auctions under Flexible Risk-Aversion

Authors: Zachary Breig, Diego Carrasco, Allan Hernandez-Chanto

Abstract:

This paper studies how contingent payments affect bidding behavior in common-value auctions. We analyze a first-price auction in which bidders compete in cash while the seller retains a fixed equity share of the asset's realized value. Bidders receive independent signals about a project whose value equals the sum of those signals, and the equity share introduces both surplus-extraction and risk-sharing effects. We combine a simple theoretical model with laboratory experiments in which the equity share and the mapping from experimental payoffs to monetary payments vary across treatments.

The results provide clear evidence of the winner's curse: bidders condition bids on their signals but systematically bid above equilibrium benchmarks. Consistent with the linkage principle, higher equity shares increase total seller revenue even though they reduce the sensitivity of bids to signals. When the payment environment induces risk aversion, bidding becomes more conservative and revenues decline, but the revenue-enhancing effect of equity remains present. Despite these behavioral deviations from equilibrium, allocations remain largely efficient. Together, the findings provide the first experimental evidence on how fixed-equity contracts shape bidding behavior in common-value auctions.

About Speaker:

Diego Carrasco Novoa is a Lecturer at the University of Auckland Business School and a member of the Centre for Mathematical Social Sciences. His research focuses on microeconomic theory, particularly auction theory, mechanism design, industrial organization, and information economics, with an emphasis on how incentives and strategic behavior shape market outcomes.