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Optimal IPO Mechanism with Retail Investors and Two Asymmetric Institutional Investors

LU Yunzhao1 , LIU Shulin2   

  1. 1.Department of Economics and Trade, Fuzhou University of Foreign Studies and Trade, Fuzhou 350202, China; School of International Trade and Economics, University of International Business and Economics, Beijing 100029, China.;2.School of International Trade and Economics, University of International Business and Economics, Beijing 100029, China.
  • Online:2017-04-25 Published:2017-03-24

LU Yunzhao,LIU Shulin. Optimal IPO Mechanism with Retail Investors and Two Asymmetric Institutional Investors[J]. Journal of Systems Science and Complexity, 2017, 30(2): 411-420.

The authors construct an IPO selling mechanism with risk neutral retail investors, and two institutional investors that are better-informed and less-informed, respectively. In the mechanism, in addition to the main constraints such as the individual rationality (IR), the incentive compatibility (IC), and the feasibility constraint (FC), the authors consider two more typical constraints: There is a lower bound and no bound for allocation of the shares to two institutional investors. The authors derive the explicit expression of the optimal allocation of the shares to the investors. Under the lower bound constraint, the optimal mechanism will encourage the better-informed bidder to report sufficiently higher signal in order to get shares. If he gets allocation of shares, then the higher signal he reports, the more shares he will get, and the more the issuer’s expected maximum revenue will be.

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