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The dynamics of bidding markets with financial constraints

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Beker, Pablo and Hernando-Veciana, Ángel (2015) The dynamics of bidding markets with financial constraints. Journal of Economic Theory, 155 . pp. 234-261. doi:10.1016/j.jet.2014.11.013

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Official URL: http://dx.doi.org/10.1016/j.jet.2014.11.013

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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.

Item Type: Journal Article
Subjects: H Social Sciences > HF Commerce
Divisions: Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH): Cash flow -- Mathematical models, Markup
Journal or Publication Title: Journal of Economic Theory
Publisher: Academic Press
ISSN: 0022-0531
Official Date: January 2015
Dates:
DateEvent
January 2015Published
27 November 2014Available
17 November 2014Accepted
22 February 2013Submitted
Volume: 155
Page Range: pp. 234-261
DOI: 10.1016/j.jet.2014.11.013
Status: Peer Reviewed
Publication Status: Published
Access rights to Published version: Open Access
RIOXX Funder/Project Grant:
Project/Grant IDRIOXX Funder NameFunder ID
ECO2012-3886[MINECO] Ministerio de Economía y Competitividadhttp://dx.doi.org/10.13039/501100003329
UNSPECIFIEDFundación Ramón Areceshttp://dx.doi.org/10.13039/100008054

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