Equilibrium bid-price dispersion

Boyan Jovanovic, Albert J. Menkveld

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

If bidding in a pure common-value auction is costly and bidders do not know how many others are also bidding, all equilibria are in mixed strategies. Participation is probabilistic, and bid prices are dispersed. The symmetric equilibrium is unique and yields simple analytic expressions. We use them to, for example, show that bid prices exhibit negative skew-ness. The expressions are further used to estimate the model based on bidding on a Standard & Poor’s 500 security. We find that the number of bidders declined over time, making liquidity supply fragile.

Original languageEnglish
Pages (from-to)426-461
Number of pages36
JournalJournal of Political Economy
Volume130
Issue number2
Early online date16 Dec 2021
DOIs
Publication statusPublished - Feb 2022

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