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The Variable Value Environment: Auctions and Actions

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  • Michael Schwarz
  • Konstantin Sonin

Abstract

This paper introduces and formally models the variable value environment and proposes an auction mechanism appropriate for it. In the variable value environment, bidders’ private values may change over time as a result of both private actions and exogenous shocks. Examples of private actions and exogenous shocks are complementary investments and exogenous changes in bidder's business, respectively. We consider a three-period model of the variable value environment where agents receive signals about their values in the first and the third periods and in the second period they take actions. This setting captures essential features of auctions of objects available for use at a future date (e. g. , a sale of a military base scheduled to close in a few years). We study mechanisms that lead to efficient allocations, i. e. those in which the final value of the object to the winning bidder net of the total cost of private actions undertaken by all agents is maximized. We characterize the first best allocation, and propose a mechanism that yields the first best allocation in equilibrium. This mechanism has an inefficient pooling equilibrium along with an efficient separating equilibrium. To rule out the pooling equilibrium, we introduce a class of e -efficient mechanisms that force players to coordinate on the separating equilibrium. We prove that one can always choose an e -efficient mechanism that yields an efficient allocation with probability arbitrarily close to one.

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Bibliographic Info

Paper provided by Harvard - Institute of Economic Research in its series Harvard Institute of Economic Research Working Papers with number 1918.

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Date of creation: 2001
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Handle: RePEc:fth:harver:1918

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References

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  1. Klemperer, Paul, 1999. " Auction Theory: A Guide to the Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 13(3), pages 227-86, July.
  2. E. Kohlberg & J.-F. Mertens, 1998. "On the Strategic Stability of Equilibria," Levine's Working Paper Archive 445, David K. Levine.
  3. Jeremy Bulow & Ming Huang & Paul Klemperer, 1999. "Toeholds and Takeovers," Journal of Political Economy, University of Chicago Press, vol. 107(3), pages 427-454, June.
  4. Levin, Dan & Smith, James L, 1994. "Equilibrium in Auctions with Entry," American Economic Review, American Economic Association, vol. 84(3), pages 585-99, June.
  5. In-Koo Cho & David M. Kreps, 1997. "Signaling Games and Stable Equilibria," Levine's Working Paper Archive 896, David K. Levine.
  6. P. Dasgupta & Eric Maskin, 1998. "Efficient Auctions," Harvard Institute of Economic Research Working Papers 1857, Harvard - Institute of Economic Research.
  7. Paul R. Milgrom, 1985. "Auction Theory," Cowles Foundation Discussion Papers 779, Cowles Foundation for Research in Economics, Yale University.
  8. Roger B. Myerson, 1977. "Incentive Compatability and the Bargaining Problem," Discussion Papers 284, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Milgrom, P. & Shannon, C., 1991. "Monotone Comparative Statics," Papers 11, Stanford - Institute for Thoretical Economics.
  10. Vijay Krishna & Motty Perry, 1997. "Efficient Mechanism Design," Game Theory and Information 9703010, EconWPA, revised 28 Apr 1998.
  11. Riordan, Michael H & Sappington, David E M, 1987. "Awarding Monopoly Franchises," American Economic Review, American Economic Association, vol. 77(3), pages 375-87, June.
  12. Myerson, Roger B. & Satterthwaite, Mark A., 1983. "Efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, vol. 29(2), pages 265-281, April.
  13. Maskin, Eric S., 2000. "Auctions, development, and privatization: Efficient auctions with liquidity-constrained buyers," European Economic Review, Elsevier, vol. 44(4-6), pages 667-681, May.
  14. Athey, Susan, 2001. "Single Crossing Properties and the Existence of Pure Strategy Equilibria in Games of Incomplete Information," Econometrica, Econometric Society, vol. 69(4), pages 861-89, July.
  15. McAfee, R. Preston & McMillan, John, 1987. "Auctions with entry," Economics Letters, Elsevier, vol. 23(4), pages 343-347.
  16. Milgrom, Paul R, 1981. "Rational Expectations, Information Acquisition, and Competitive Bidding," Econometrica, Econometric Society, vol. 49(4), pages 921-43, June.
  17. Haim Levy, 1992. "Stochastic Dominance and Expected Utility: Survey and Analysis," Management Science, INFORMS, vol. 38(4), pages 555-593, April.
  18. Paul Milgrom & Robert J. Weber, 1981. "A Theory of Auctions and Competitive Bidding," Discussion Papers 447R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  19. Richard L. Fullerton & R. Preston McAfee, 1999. "Auctioning Entry into Tournaments," Journal of Political Economy, University of Chicago Press, vol. 107(3), pages 573-605, June.
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Cited by:
  1. Giacomo Calzolari & Alessandro Pavan, 2005. "Monopoly with Resale," Discussion Papers 1405, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Michael Schwarz & Sergei Severinov, 2010. "Investment Tournaments: When Should a Rational Agent Put All Eggs in One Basket?," Journal of Labor Economics, University of Chicago Press, vol. 28(4), pages 893-922, October.
  3. Andreas Lange & John A. List & Michael K. Price, 2010. "Auctions with Resale When Private Values Are Uncertain: Evidence from the Lab and Field," NBER Working Papers 16360, National Bureau of Economic Research, Inc.
  4. Sonin Konstantin, 2004. "Private interest in public tenders: no revenue, no efficiency and no social benefits," EERC Working Paper Series 00-111e, EERC Research Network, Russia and CIS.
  5. Schmöller, Arno, 2010. "Bidding Behavior, Seller Strategies, and the Utilization of Information in Auctions for Complex Goods," Munich Dissertations in Economics 11175, University of Munich, Department of Economics.

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