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Auction design with endogenously correlated buyer types

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  • Krähmer, Daniel
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    Abstract

    This paper studies optimal auction design when the seller can affect the buyersʼ valuations through an unobservable ex ante investment. The key insight is that the optimal mechanism may have the seller play a mixed investment strategy so as to create correlation between the buyersʼ otherwise (conditionally) independent valuations. Assuming that the seller announces the mechanism before investing, the paper establishes conditions on the investment technology so that a mechanism exists which leaves buyers no information rent and leaves the seller indifferent between his investments. Under these conditions, the seller can, in fact, extract the first best surplus almost fully.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economic Theory.

    Volume (Year): 147 (2012)
    Issue (Month): 1 ()
    Pages: 118-141

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    Handle: RePEc:eee:jetheo:v:147:y:2012:i:1:p:118-141

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    Web page: http://www.elsevier.com/locate/inca/622869

    Related research

    Keywords: Auction; Ex ante investment; Full surplus extraction; Correlation; Mechanism design;

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    References

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    15. Barelli, Paulo, 2009. "On the genericity of full surplus extraction in mechanism design," Journal of Economic Theory, Elsevier, vol. 144(3), pages 1320-1332, May.
    16. Parreiras, Sergio O., 2005. "Correlated information, mechanism design and informational rents," Journal of Economic Theory, Elsevier, vol. 123(2), pages 210-217, August.
    17. McAfee, R Preston & Reny, Philip J, 1992. "Correlated Information and Mechanism Design," Econometrica, Econometric Society, vol. 60(2), pages 395-421, March.
    18. Juan-JosÈ Ganuza & JosÈ S. Penalva, 2010. "Signal Orderings Based on Dispersion and the Supply of Private Information in Auctions," Econometrica, Econometric Society, vol. 78(3), pages 1007-1030, 05.
    19. Bikhchandani, Sushil, 2010. "Information acquisition and full surplus extraction," Journal of Economic Theory, Elsevier, vol. 145(6), pages 2282-2308, November.
    20. Cremer, Jacques & McLean, Richard P, 1988. "Full Extraction of the Surplus in Bayesian and Dominant Strategy Auctions," Econometrica, Econometric Society, vol. 56(6), pages 1247-57, November.
    21. Kim-Sau Chung & J.C. Ely, 2007. "Foundations of Dominant-Strategy Mechanisms," Review of Economic Studies, Oxford University Press, vol. 74(2), pages 447-476.
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