UC Berkeley

Consider a first-price, sealed-bid auction where participants have affiliated valuations and private budget constraints; that is, bidders have private multidimensional types. We offer sufficient conditions for the existence of a monotone equilibrium in this environment along with an equilibrium characterization. Hard budget constraints introduce two competing effects on bidding. The direct effect depresses bids as participants hit their spending limit. The strategic effect encourages more aggressive bidding by participants with large budgets. Together these effects can yield discontinuous equilibrium strategies stratifying competition along the budget dimension. The strategic consequences of private budget constraints can be a serious confound in interpreting bidding behavior in auctions. Evidence from an experimental auction market lends support to the strategic importance of budget constraints.