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The relation between variance and information rent in auctions

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Author Info

  • Katzman, Brett
  • Reif, Julian
  • Schwartz, Jesse A.

Abstract

This paper examines the conventional wisdom, expressed in McAfee and McMillan's (1987) widely cited survey paper on auctions, that links increased variance of bidder values to increased information rent. We find that although the conventional wisdom does indeed hold in their (1986) model of a linear contract auction, this relationship is an artifact of that particular model and cannot be generalized. Using Samuelson's (1987) model, which is similar but allows for unobservable costs, we show that increased variance does not always imply increased information rent. Finally, we give the appropriate measure of dispersion (different from variance) that provides the link between the bidder value distribution and information rent.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 28 (2010)
Issue (Month): 2 (March)
Pages: 127-130

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Handle: RePEc:eee:indorg:v:28:y:2010:i:2:p:127-130

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Web page: http://www.elsevier.com/locate/inca/505551

Related research

Keywords: Dispersion Information rent Variance Contract auctions;

References

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  1. Milgrom,Paul, 2004. "Putting Auction Theory to Work," Cambridge Books, Cambridge University Press, number 9780521551847, October.
  2. Susan Athey & Jonathan Levin & Enrique Seira, 2008. "Comparing Open and Sealed Bid Auctions: Evidence from Timber Auctions," NBER Working Papers 14590, National Bureau of Economic Research, Inc.
  3. Patrick Bajari & Lixin Ye, 2001. "Deciding Between Competition and Collusion," Working Papers 01008, Stanford University, Department of Economics.
  4. Samuelson, William, 1987. "Auctions with Contingent Payments: Comment," American Economic Review, American Economic Association, vol. 77(4), pages 740-45, September.
  5. Han Hong & Matthew Shum, 2001. "Increasing Competition and the Winner's Curse: Evidence from Procurement," Economics Working Paper Archive 447, The Johns Hopkins University,Department of Economics.
  6. Baldwin, Laura H & Marshall, Robert C & Richard, Jean-Francois, 1997. "Bidder Collusion at Forest Service Timber Sales," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 657-99, August.
  7. Elena Krasnokutskaya, 2004. "Identification and Estimation in Highway Procurement Auctions under Unobserved Auction Heterogeneity," PIER Working Paper Archive 05-006, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  8. Vuong, Q. & Laffont, J.J. & Elyakime, B. & Loisel, P., 1995. "Auctioning and Bargaining: An Econometric Study of Timber Auctions with Secret Reservation Prices," Papers 9502, Southern California - Department of Economics.
  9. McAfee, R Preston & McMillan, John, 1987. "Auctions and Bidding," Journal of Economic Literature, American Economic Association, vol. 25(2), pages 699-738, June.
  10. Patrick Bajari & Stephanie Houghton & Steve Tadelis, 2006. "Bidding for Incomplete Contracts: An Empirical Analysis," NBER Working Papers 12051, National Bureau of Economic Research, Inc.
  11. R. Preston McAfee & John McMillan, 1986. "Bidding for Contracts: A Principal-Agent Analysis," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 326-338, Autumn.
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