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ERC WORKING PAPERS

The Scope of Auctions in the Presence of Downstream Interactions and Information Externalities

Onur A. Koska, İlke Onur and Frank Stähler

Abstract:
We scrutinize the scope of auctions for firm acquisitions in the presence of downstream interactions and information externalities. We Show that no mechanism exists that allows an investor to acquire a low-cost firm under incomplete information: a separating auction implies adverse selection and relies substantially on commitment to allocation and transfer rules. A pooling auction serves as a commitment device against ex-post opportunistic behavior and alleviates adverse selection. It can earn the investor a higher expected payoff than a separating auction, even when consistency is required as to qualify for a sequential equilibrium.

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2016

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