Securities Auctions with Pre-Project Information Management

This paper analyzes securities auctions for which bidders have an option to acquire information after winning the right to develop a project. The payment in the securities auctions consists of an up-front cash bid and a contingent security bid. The contingent payment distorts investment and information acquisition relative to the first-best. Steep securities necessarily provide the agent with lower incentives to acquire information that prevent either Type I or Type II errors, compared to flat securities. To extract information rents, the optimal securities auction involves a contingent cash payment; and when agents are protected by limited liability, the optimal contingent payment takes the form of debt contracts. Both contingent contracts produce the minimal distortions in the agent's incentives to acquire performance-enhancing information. The model delivers implications on the practices in oil lease auctions