Publication:
The dynamics of bidding markets with financial constraints

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URI: https://hdl.handle.net/10016/20440
ISSN: 0022-0531
DOI: 10.1016/j.jet.2014.11.013
UXXI: AR/0000016247
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dynamics_hernando_JET_2015_ps.pdf (1.28 MB)
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2015-01
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Elsevier
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Abstract
We develop a model of bidding markets with financial constraints `a la Che and Gale (1998b) 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 di↵erences, 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.
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Bidding markets, Financial constraints, Markups, Money left on the table, Industry dynamics, All pay auctions
Bibliographic citation
Journal of Economic Theory (2015). 155, 234-261.
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