Raising Money ∗

A standard problem in finance is that of an agent, with an asset, who seeks to raise a fixed amount of money by selling part of it. For example, consider an entrepreneur who sells shares in his company to raise a fixed amount of money from venture capitalists, or a firm in financial distress that has to sell off some of its assets to settle its obligations. These sales differ from the standard auction format in which a seller tries to earn as much as possible from selling a pre-determined quantity of his good. The difference is economically important: We show many standard results do not go through in these “raising money” auctions with interdependant values. First, because symmetric and increasing pure strategy equilibria do not always exist in a first-price raising money auction, we present a condition under which they do. Second, we present conditions under which the standard seller preferences predicted by the linkage principle over auction types are reversed. Third, we characterize when a seller may not want to release information — in other words, we show that the linkage principle is again violated. Our results have implications for the choice and regulation of auctions that are designed to raise a fixed amount of money. ∗This paper is a substantially revised version of our working paper (“Fixed Revenue Auctions,” 2004) at Carnegie Mellon University. We thank Jeremy Bertomeu, Charles Chang, Burton Hollifield, Fallaw Sowell, Yajun Wang, and seminar participants at Carnegie Mellon University and Summer Institute of Finance. †Cheung Kong Graduate School of Business, [email protected] ‡Haas School, UC Berkeley [email protected]