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Selling real assets

the impact of idiosyncratic project risk in an auction environment

Di Corato, Luca and Moretto, Michele (2016). Selling real assets. Uppsala: (NL, NJ) > Dept. of Economics, Sveriges lantbruksuniversitet. Working paper series / Swedish University of Agricultural Sciences, Department of Economics ; 2016:09
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Abstract

Consider a seller auctioning a real asset among n agents. Each agent contemplates a specific investment project and the asset is crucial for its activation. Project cash flows and their volatility are private information. A first-price auction is considered and the asset is granted in exchange for a payment to be paid at the investment time. Here we determine the optimal bid function and show that the auction is efficient. The asset is assigned to the project characterized by the highest volatility in the associated cash flows. Interestingly, the bid does not depend on the time at which the project is actually executed or on the changes in post-auction cash flows. We also address concerns about the distribution of the project value among the parties and show that i) the winner always holds the largest share of the ex-post project value when projects are characterized by sufficiently high cash flow volatility and ii) negative systematic risk reduces, ceteris paribus, the share accruing to the seller. Finally, we show that cash flow volatility has an ambiguous effect on losses due to the presence of information asymmetry.

Authors/Creators:Di Corato, Luca and Moretto, Michele
Title:Selling real assets
Subtitle:the impact of idiosyncratic project risk in an auction environment
Series/Journal:Working paper series / Swedish University of Agricultural Sciences, Department of Economics (1401-4068)
Year of publishing :29 August 2016
Depositing date:29 August 2016
Number:2016:09
Number of Pages:36
Place of Publication:Uppsala
Publisher:Department of Economics, Swedish University of Agricultural Sciences.
ISSN:1401-4068
Language:English
Publication Type:Report
Full Text Status:Public
Agris subject categories.:E Economics, development, and rural sociology > E13 Investment, finance and credit
Subjects:(A) Swedish standard research categories 2011 > 5 Social Sciences > 502 Economics and Business > Economics
Agrovoc terms:assets, investment, purchasing, risk factors, economic analysis, auctions, models
Keywords:first-price auctions, procurement, idiosyncratic risk, adverse selection, moral hazard, continuous-time models
URN:NBN:urn:nbn:se:slu:epsilon-e-3659
Permanent URL:
http://urn.kb.se/resolve?urn=urn:nbn:se:slu:epsilon-e-3659
ID Code:13610
Faculty:NJ - Fakulteten för naturresurser och jordbruksvetenskap
Department:(NL, NJ) > Dept. of Economics
Deposited By: DR LUCA DI CORATO
Deposited On:15 Sep 2016 10:05
Metadata Last Modified:15 Sep 2016 10:05

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