Credit contracting and bidding under wealth constraints. (Q1852657)

Bidders are typical financially constrained in auctions of valuable goods. Research seeking to understand the significance of this constraints has focused on a number of different aspects of the problem. In the article a credit contracting and bidding in a first-price sealed-bid auction is modeled in the case when bidder valuation and wealth are private information. It is found that an efficient separating equilibrium exists only if the wealth levels of both bidder types are sufficiently different. If not -- high-valuation bidders signal by borrowing more and using less of their wealth -- this is inefficient as wealth is a cheaper source of funds.