A Principal-Agent Model of Bidding Firms in Multi-Unit Auctions

Principal-agent relationships between the supervisory board and the management of bidding firms in auctions are widespread in high-stakes auctions. Often only the agent has information about the value of the objects being sold. The board wants to maximize the profit, but the management wants to win the package with the highest value. In environments where it is efficient for firms to coordinate, we show that the principals would coordinate, while the agents would not. We analyze environments with decreasing levels of information that the principal has about the valuations. Sometimes it can also be impossible to set budget constraints which align the agents' strategies in equilibrium. The analysis helps explain price wars in high-stakes auctions