Auctions with Budget-Constrained Buyers: A Nonequivalence Result
Anecdotal evidence of concern about the limited financial resources of small firms abounds in government auctions. Recent empirical work also provides evidence of the importance of capital constraints. In this paper, we show that the first-price sealed-bid auction yields higher expected revenue than the second-price sealed-bid auction if buyers face wealth constraints. Differences in the extent to which wealth constraints bind in the different auction formats generate the revenue nonequivalence.
Suggested citation: Che, Yeon-woo, and Ian Gale, 1994. “Auctions with Budget-Constrained Buyers: A Nonequivalence Result,” Federal Reserve Bank of Cleveland, Working Paper no. 94-02.