Department of Economics. University of Melbourne. Parkville Victoria 3052 Australia
ABSTRACT
We examine lending and bidding when bidders, whose valuation for the good and wealth are private information, must borrow to fund their bid in a first-price sealed-bid auction. Any separating equilibrium is unique and the winning bidder type randomizes their bids. If the wealth levels of the bidder types are sufficiently different, this equilibrium is also efficient. If not, inefficient equilibria may exist in which high valuation bidders signal their type by increasing borrowing and not investing all wealth, the latter being less costly. An increase in the level of borrowing required to signal results in a lower expected winning bid if also bidder wealth is sufficiently high. Pooling equilibria exist only if the wealth of different bidder types have sufficiently similar levels of wealth, and involve all bidders employing pure strategy bids. If lenders impose credit limits on loan schedules, there may exist an additional separating equilibrium.
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