 Each
of you is either a firm or an investor.
 Each period, firms will offered a new
project. Whether the value is high (H) or
low (L) will be chosen randomly with a
50% probability of each. Each firm (but
not the investors) will know if it is H or L.
 Each firm will be offered a “project
taken” and a “project not taken” value for
each period.
 Every project (H or L) costs 300 francs to
undertake.
 If
a firm wants to undertake the offered
project, it must finance it through
investors. By agreeing to undertake the
project, the firms agree to auction off
whatever share of the firm’s value
investors demand to provide 300 francs.
 Only one investor can finance each
project. We will conduct an auction
starting at 100% of the final firm value
and decreasing until there is only 1
bidder left. That bidder will pay his/her
bid.

Firm A faces:
No New
Project
With New
Project
H Firms
300
1000
L Firms
100
500
Firm A randomly selects L.
If Firm A chooses not to undertake the project, it
receives 100.
 If Firm A chooses to undertake the project, an
auction takes place.
 Assume the “lowest” bid is 50%.
 That investor pays 300 francs and receives 50%
of the firm’s value, or 0.5(500) = 250. The firm
receives 0.5(500) = 250, but pays nothing.


 Each
period, each firm will randomly
draw H or L.
 Each firm will decide whether to take the
project and write it on a piece of paper.
 I will announce to investors whether a
given firm has decided to undertake the
project. If the firm has, I will conduct a
“high to low” auction to determine the
investor financing.
No New Project
With New Project
H Firms
625
1250
L Firms
300
750
No New Project
With New Project
H Firms
200
625
L Firms
50
375