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The relation between variance and information rent in auctions

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  • Katzman, Brett
  • Reif, Julian
  • Schwartz, Jesse A.
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    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. Alain Chateauneuf & Michèle Cohen & Isaac Meilijson, 2004. "Four notions of mean preserving increase in risk, risk attitudes and applications to the Rank-Dependent Expected Utility model," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00212281, HAL.
    2. Milgrom,Paul, 2004. "Putting Auction Theory to Work," Cambridge Books, Cambridge University Press, number 9780521551847.
    3. Hong, Han & Shum, Matthew, 2002. "Increasing Competition and the Winner's Curse: Evidence from Procurement," Review of Economic Studies, Wiley Blackwell, vol. 69(4), pages 871-98, October.
    4. Francesco Decarolis, 2009. "When the highest bidder loses the auction: theory and evidence from public procurement," Temi di discussione (Economic working papers) 717, Bank of Italy, Economic Research and International Relations Area.
    5. Patrick Bajari & Lixin Ye, 2001. "Deciding Between Competition and Collusion," Working Papers 01008, Stanford University, Department of Economics.
    6. Samuelson, William, 1987. "Auctions with Contingent Payments: Comment," American Economic Review, American Economic Association, vol. 77(4), pages 740-45, September.
    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. Marshall, R.C. & Richard J.F., 1995. "Bider Collusion at Forest Service Timber Sales," Papers 7-95-3, Pennsylvania State - Department of Economics.
    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. McAfee, R Preston & McMillan, John, 1987. "Auctions and Bidding," Journal of Economic Literature, American Economic Association, vol. 25(2), pages 699-738, June.
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