Experimental and theoretical essays in auctions and financial markets [Elektronische Ressource] / vorgelegt von Sotirios Georganas
125 Pages
English

Experimental and theoretical essays in auctions and financial markets [Elektronische Ressource] / vorgelegt von Sotirios Georganas

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Experimental and theoretical essays in auctions and nancial marketsInaugural Dissertationzur Erlangung des Grades eines Doktorsder Wirtschafts- und Gesellschaftswissenschaftendurch dieRechts- und Staatswissenschaftliche Fakult at derRheinischen Friedrich-Wilhelms-Universit at Bonnvorgelegt vonSotirios Georganasaus Athen, GriechenlandBonn, 2010Dekan: Professor Dr. Erik TheissenErstreferent: Professor Dr. Reinhard SeltenZweitreferent: Dr. Rosemarie NagelMundlic he Prufung: 13.03.2009 στους γον εις μου ( και χρηματοδ οτες μου) AbstractThis dissertation deals with auctions and other, financial market mechanisms, andhow they work in real life situations. Such mechanisms have been extensively studiedin economics and many elegant results have been gained. These results have beenalso used in the design of real life auctions, competitions and financial markets. Inthisdissertation, I showthattherearerelevantfactsthatshouldinfluence mechanismdesign for practical purposes, but are omitted in the main corpus of the literature.One of these facts, explored in the first chapter of the dissertation, based on asingle authored manuscript of this author, deals with resale possibilities. Whenevera durable good is sold, there is always a possibility that it will be resold. Evenwhen such resale is forbidden, many imaginative ways have been found to overcomethe restrictions.

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Published 01 January 2010
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Experimental and theoretical essays in auctions and
nancial markets
Inaugural Dissertation
zur Erlangung des Grades eines Doktors
der Wirtschafts- und Gesellschaftswissenschaften
durch die
Rechts- und Staatswissenschaftliche Fakult at der
Rheinischen Friedrich-Wilhelms-Universit at Bonn
vorgelegt von
Sotirios Georganas
aus Athen, Griechenland
Bonn, 2010Dekan: Professor Dr. Erik Theissen
Erstreferent: Professor Dr. Reinhard Selten
Zweitreferent: Dr. Rosemarie Nagel
Mundlic he Prufung: 13.03.2009 στους γον εις μου ( και χρηματοδ οτες μου) Abstract
This dissertation deals with auctions and other, financial market mechanisms, and
how they work in real life situations. Such mechanisms have been extensively studied
in economics and many elegant results have been gained. These results have been
also used in the design of real life auctions, competitions and financial markets. In
thisdissertation, I showthattherearerelevantfactsthatshouldinfluence mechanism
design for practical purposes, but are omitted in the main corpus of the literature.
One of these facts, explored in the first chapter of the dissertation, based on a
single authored manuscript of this author, deals with resale possibilities. Whenever
a durable good is sold, there is always a possibility that it will be resold. Even
when such resale is forbidden, many imaginative ways have been found to overcome
the restrictions. The possibility of resale alters many standard results regarding
the e fficiency of the commonly used mechanisms and their revenue ranking. While
the importance of resale has been recognized early (see Milgrom 1987) there is a
relative dearth of models including resale until quite recently (see the work of Philip
Haile 1999, 2001, 2003). This is probably due to the widespread belief that resale
possibilities are adequately covered by models with common values. However Haile
(1999, 2001, 2003) has shown theoretically that this is often not true. The first
chapter of the dissertation shows that resale also matters in the laboratory. Two
treatments were designed and tested for this purpose. In both there is an English
auction where bidders have private values. The initial auction is followed by a second
stage where the winner is allowed to resell the good to the other players in an English
auction with a reserve price. In one treatment, the winner can only base his reserve
price on the signals the other players sent through their bids. In the other treatment
ihowever, allprivatevaluesbecomepublicaftertheinitialauctionandthusthereserve
price is set equal to the highest private value among all players. In both treatments,
biddingyourvaluewasanequilibriumstrategy, exactlyasinasimpleEnglishauction
without resale. The results of the experiments show that resale possibilities, do
indeed influence bidding even when the theory predicts no change. We attribute
this deviation to the phenomenon of noisy behavior and employ a range of bounded
rationality models like a QRE and a levels of reasoning model to formally test the
hypothesis. Additionallywefindthattheexactstructureoftheresalemarketmatters,
as behavior in the two resale treatments di ffered significantly.
In the second chapter of the dissertation, based on a paper coauthored with Rose-
marie Nagel, another kind of omitted characteristic of many auctions is treated,
namely toeholds. In many auctions one or many of the potential bidders already
own a part of the asset that is being sold. In these cases the equilibrium strategies
can be very di fferent. In Bulow et al. (1999) the authors predict that even very small
toeholds can have an explosive e ffect. Strong players, ie the ones with the highest
toehold, bid in equilibrium much more aggressively than in the simple case without
toeholds and weak players bid much less aggressively. We decided again to test this
predictioninthelabandfailedtofindanysignsofanexplosiveequilibrium. However,
bidders behave di fferently with respect to normal auctions without toeholds and the
sizeofthetoeholdsmatters. WeattributethefailureoftheNashpredictiontotheex-
treme nature of this equilibrium. Payo ff functions are unusually flat, in e ffect bidders
can deviate as much as 50% from the equilibrium strategy with only minimal losses
in payo ffs. Such an equilibrium is highly implausible and unstable; if bidders have
even small biases towards some particular action, in many cases there is no su fficient
force, in the form of pecuniary incentives, that will move them towards equilibrium.
The results of these first two chapters not only advance knowledge in the applica-
tion of the auctions and mechanism design theory. The behavioral results should add
to the predictive power of game theoretic models in general. It is a widely applicable
observation that in games where the equilibrium payo ffsareflat, real players do not
necessarily play strategies predicted by theory. Additionally, the papers focus on the
behavioral e ffect of noisy behavior and the anticipation thereof. If a small amount of
iinoise changes the players’ best responses drastically, they will tend to deviate from
equilibriumin order to insure themselves fromunexpected behavior on behalf of their
opponents. In most real life situations such noise is to be expected. It may also be
a kind of experimentation, players try a range of strategies before they settle down.
Moreover, noisy communication or false interpretation of instructions -when players
interact through agents- can also have an e ffect. A final source for such noise can be
just other considerations that are treated as exogenous in these models, reasons for
which players might want to deviate from equilibrium such as focal points, altruism,
fairness etc
The third chapter is based on joint work with Michael Zaehringer. It proposes a
mechanism to sell an asset when there are many small players who have information
about the private values of other players. In concrete terms, we think of the case
where there is a seller of a large asset (say a company) and some strategic buyers
who want to acquire the control of the asset. We divide the value of the asset in a
commonvaluepart, thatstemsfromthecashflowandaprivatevaluepartthatstems
from private benefits of control. The firstpartiscommonknowledge.Theprivate
values however are not known to the seller, but are known to some small informed
speculators, for example investment banks. The seller’s problem is then to get this
information in order to appropriate more rents from the potential buyer.
A mechanism that is often proposed when selling an asset to a few strategic
buyers is an auction. However, such an auction will fail to use the information of
the informed speculators, who are too small to participate. A mechanism with better
information aggregation properties is a sale of shares of this company through an
IPO.ThedownsideofanIPOisthatitremovespowerfromthehandsoftheseller.
The chapter proposes a two stage mechanism that combines the strengths of these
two mechanisms. In the first stage a small part of the shares is sold through an IPO
and a price is formed that, as we shall see, aggregates the information of the small
speculators. The seller then uses this information to design an optimal auction in the
second stage and maximize his revenue when selling the rest of the asset (including
the controlling rights) to the large strategic investor.
A key detail that makes the two stage mechanism work is minority shareholder
iiiprotection, in the form of the sell-out rule. This rule specifies minority shareholders
can force majority shareholders to buy their shares for a fair price. Because of this
rule, the speculators have an incentive to buy shares in thefirst stage and reveal their
information. Thus the paper shows that a previously unstudied result of minority
shareholder protection is that speculators are induced to participate and thus add to
the informational content of market prices.
ivAcknowledgments
I would like to thank Reinhard Selten, Rosemarie Nagel, John Kagel and Benny
Moldovanu for their support and fruitful conversations. I would also like to thank
CharlesHolt,VincentCrawford,ThomasPalfrey,JacobGoeree,PhilipHaileandPaul
Heidhues for useful comments. Finally I thank everyone at the BGSE, in particular
Marc,Matthias,Michal,Michael,Lars,Ste ffen and Juergen, for being very capable
peers in scientific times, supportive friends in the hard times and excellent buddies in
the, not frequent enough, happy times. May every graduate school year have as nice
a group as the one we had.
vContents
Abstract i
Acknowledgments v
1 English Auctions with Resale 1
1.1Introduction................................ 1
1.2Experimentaldesign........................... 5
1.3 Equilibrium predictions . ......................... 9
1.3.1 Completeinformation-COMP................. 9
1.3.2 IncompleteInformation-INC.................. 1
1.4ExperimentalResults 1
1.4.1 CompleteInformation-COMP 15
1.4.2 IncompleteInformation-INC 18
1.5Boundedrationalityandnoisydecisionmaking............. 20
1.5.1 Completeinformationintheresalemarket-COMP...... 2
1.5.2 Incompleteinformationintheresalemarket-INC....... 3
1.6Discusionandideasforfuturework.................. 35
1.7 Conclusions................................ 37
1.8Appendix.... 38
2 Auctions with Toeholds 39
2.1Introduction............ 39
2.2Themodel.... 42
vi2.3Theexperimentalsetup.......................... 4
2.4Experimentalresults........................... 46
2.4.1 Theoreticalanalysis........................ 51
2.4.2 Doesatoeholdgrantitsholderarealadvantage?....... 59
2.4.3 Toeholdsandalmostcommonvalues.............. 61
2.5Conclusions................................ 63
3 Information Revealing Speculation 65
3.1Introduction............ 65
3.2Themodel.... 71
3.2.1 Equilibrium ............................ 75
3.2.2 Secondstage........................... 76
3.2.3 First stage............................. 79
3.2.4 Existenceofequilibrium. 84
3.2.5 Revenuecomparison....................... 86
3.3DiscusionandExtensions........................ 90
3.3.1 Strategicuninformedtraders................... 91
3.3.2 More than two states of the world and zero information equilibria 94
3.3.3 BargainingPower......................... 95
3.3.4 Informationstructure 96
3.4Conclusions................................ 96
3.5AppendixA:Proofs............................ 97
3.6AppendixB:NumericalExample.................... 99
3.6.1 Comparativestatics........................101
Bibliography 105
vii