The Rules 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.

The Rules 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.

For Example… Firm A faces: 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. No New Project With New Project H Firms 300 1000 L Firms 100 500

Steps in the Game 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.

Game 1 No New Project With New Project H Firms 625 1250 L Firms 300 750

Game 2 No New Project With New Project H Firms 200 625 L Firms 50 375