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Optimal Mechanism Design with Resale: An Ex-Ante Price Default Model

Author

Listed:
  • Weiye Cheny

    (Graduate School of Economics, Osaka University)

Abstract
This paper investigates the optimal ex-ante price mechanism design of selling a single indivisible object in a market that comprises one public risky buyer and one regular risky buyer under unlimited or limited liability where resale is allowed. First, we propose an endogenous liquidation rule requiring that the public buyer acquires the object in the liquidation stage. Next, we design an optimal bankruptcy transfer to prevent the buyer's strategic default. On the basis of this liquidation rule, the optimal ex-ante price mechanism is designed to achieve the seller's upper bound revenue under unlimited and limited liability when resale cannot be prohibited prior to the liquidation stage. Comparing the two mechanisms, the results illustrate that the effect on the seller's behavior and that revenue over the liability and information change in each case. In other words, (i) when faced with limited liability buyers, the regular buyer will obtain the object in the initial market, whereas they will become the loser under the unlimited liability case; (ii) the seller's expected revenue under unlimited liability is weakly higher than that under limited liability; and (iii) when faced with the risky buyer, the seller prefers the buyer's resale behavior and is averse to the speculator only under the limited liability case.

Suggested Citation

  • Weiye Cheny, 2018. "Optimal Mechanism Design with Resale: An Ex-Ante Price Default Model," Discussion Papers in Economics and Business 18-24, Osaka University, Graduate School of Economics.
    • Handle: RePEc:osk:wpaper:1824
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    File URL: http://www2.econ.osaka-u.ac.jp/library/global/dp/1824.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Mechanism design Bankruptcy Endogenous bankruptcy recovery Resale;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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