Zheng, Charles Zhoucheng

B.E. Journal of Economic Analysis & Policy Vol. 9 no. 1 (Contributions) (April 30 2009) (Originally published as WP #09005, March 2009)

Applying auction theory to the toxic-asset rescue plan currently released by the United States Treasury Department, this paper demonstrates an equilibrium where moderately poor bidders outbid rich bidders in such auctions. After defeating their rich rivals and acquiring the toxic assets, such bidders will default on government-provided loans whenever the toxic assets turn out to be unsalvageable. An alternative mechanism is discussed.

Keywords: auction, toxic assets, default, rescue plan

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