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Bidding with Coordination Risks
Timo Ehrig, Jürgen Jost and Rosemarie Nagel
We propose a game to study the interaction of bidding and coordination uncertainty. Two players bid under strategic market game rules over shares of a joint project after obtaining noisy signals about its value. Each player has the alternative option to refrain from bidding and to get a safe outside payoff. Ex ante there is no motive to be the only investor, since this is associated with a low project value. We prove the existence of a unique perfect Bayesian equilibrium by using techniques from the calculus of variations. Because of the coordination risk a joint threshold emerges above which it is optimal for agents to invest. Furthermore, this risk dampens competition and therefore, compared to a standard strategic market game with incomplete information, bids are substantially lower, especially when the expected project value is low. From a technical point of view, we are the first to study a global game with continuous strategies containing strategic complements as well as strategic substitutes.