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The dynamics of bidding markets with financial constraints

Beker, Pablo F.; Hernando-Veciana, Ángel

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Authors

Pablo F. Beker



Abstract

We develop a model of bidding markets with financial constraints à la Che and Gale [15] in which two firms choose their budgets optimally and we extend it to a dynamic setting over an infinite horizon. We provide three main results for the case in which the exogenous cash-flow is not too large and the opportunity cost of budgets is positive but arbitrarily low. First, firms keep small budgets and markups are high most of the time. Second, the dispersion of markups and “money left on the table” across procurement auctions hinges on differences, both endogenous and exogenous, in the availability of financial resources rather than on significant private information. Third, we explain why the empirical analysis of the size of markups based on the standard auction model may have a bias, downwards or upwards, positively correlated with the availability of financial resources. A numerical example illustrates that our model is able to generate a rich set of values for markups, bid dispersion and concentration.

Citation

Beker, P. F., & Hernando-Veciana, Á. (2015). The dynamics of bidding markets with financial constraints. Journal of Economic Theory, 155, 234-261. https://doi.org/10.1016/j.jet.2014.11.013

Journal Article Type Article
Acceptance Date Nov 17, 2014
Online Publication Date Nov 27, 2014
Publication Date Jan 1, 2015
Deposit Date Jun 15, 2018
Publicly Available Date Mar 29, 2024
Journal Journal of Economic Theory
Print ISSN 0022-0531
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 155
Pages 234-261
DOI https://doi.org/10.1016/j.jet.2014.11.013
Public URL https://durham-repository.worktribe.com/output/1324118

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