We study security-bid auctions in which bidders compete for an asset by bidding with securities. That is, they offer payments that are contingent on the realized value of the asset being sold. The value depends on investment by the winner, thus creating the possibility of moral hazard. Such auctions are commonly used, both formally and informally. In formal auctions, the seller generally restricts bids to an ordered set, such as an equity share or royalty rate. By restricting the bids, standard auction formats such as first and second-price auctions can be used. In informal settings with competing buyers, the seller does not commit to a mechanism upfront. Rather, bidders offer securities and the seller chooses the most attractive bid, based on his beliefs, ex-post.
