Delegated Bidding and the Allocative Effects of Alternative Accounting Rules

I study the efficiency of three prominent accounting rules in a delegated bidding setting where bidders’ incentives are tied to both accounting income and economic surplus. Trade efficiency is maximized (minimized) by the value-in-use method (historical cost method). The exit-value method generates an accounting based winner’s curse that results in fire-sale-like valuations. Yet, in the limit, as the number of bidders grows large, the efficiency of the exit-value method converges to that of the value-in-use method.