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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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    File URL: http://www.sciencedirect.com/science/article/pii/S0022053111001670
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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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    1. D'ASPREMONT, Claude & CREMER, Jacques & GERARD-VARET, Louis-André, . "Balanced Bayesian mechanisms," CORE Discussion Papers RP -1690, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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    3. Cremer, J. & Khalil, F. & Rochet, J-C., 1997. "Contracts and productive information gathering," Discussion Paper Series In Economics And Econometrics 9707, Economics Division, School of Social Sciences, University of Southampton.
    4. Dirk Bergemann & Juuso Vaimaki, 2000. "Information Acquisition and Efficient Mechanism Design," Cowles Foundation Discussion Papers 1248, Cowles Foundation for Research in Economics, Yale University.
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    12. Ichiro Obara, 2006. "The Full Surplus Extraction Theorem with Hidden Actions," Levine's Bibliography 122247000000001206, UCLA Department of Economics.
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    14. 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.
    15. Laffont, Jean-Jacques & Martimort, David, 1998. "Mechanism Design with Collusion and Correlation," IDEI Working Papers 81, Institut d'Économie Industrielle (IDEI), Toulouse.
    16. Bikhchandani, Sushil, 2010. "Information acquisition and full surplus extraction," Journal of Economic Theory, Elsevier, vol. 145(6), pages 2282-2308, November.
    17. 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.
    18. Hori, Kazumi, 2005. "Inefficiency in a Bilateral Trading Problem with Cooperative Investment," Discussion Papers 2005-02, Graduate School of Economics, Hitotsubashi University.
    19. 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.
    20. A. Michael Spence, 1975. "Monopoly, Quality, and Regulation," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 417-429, Autumn.
    21. Kosenok, Grigory & Severinov, Sergei, 2008. "Individually rational, budget-balanced mechanisms and allocation of surplus," Journal of Economic Theory, Elsevier, vol. 140(1), pages 126-161, May.
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