Delve into the future of research at MiS with our preprint repository. Our scientists are making groundbreaking discoveries and sharing their latest findings before they are published. Explore repository to stay up-to-date on the newest developments and breakthroughs.
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.