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Auctions for Oil and Gas Leases with an Informed Bidder and a Random Reservation Price

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  • Kenneth Hendricks
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    Abstract

    The paper analyzes a first price, sealed bid auction with a random reservation price where the object has an unknown common value, but one buyer has better information than the others. We permit the reservation price to be correlated with the information of the informed buyer, which reflects both his assessment of the value of the object and probability of rejection at any bid. Assuming all random variables are affiliated, we establish the following results. (1) The rate of increase in the distribution of the uninformed bidder is never greater than the rate of increase in the distribution of the informed bid. (2) The distributions are identical at bids above the support of the reservation price. (3) The informed buyer is more likely to submit low bids. We demonstrate that these restrictions are satisfied by bid data from the federal sales of offshore drainage leases.

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    File URL: http://www.kellogg.northwestern.edu/research/math/papers/910.pdf
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    Bibliographic Info

    Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 910.

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    Date of creation: Oct 1990
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    Handle: RePEc:nwu:cmsems:910

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    Web page: http://www.kellogg.northwestern.edu/research/math/
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    Related research

    Keywords: Affiliation; Bidding; Oil; Auctions.;

    References

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    1. Kenneth Hendricks & Robert H. Porter & Richard H. Spady, 1989. "Random Reservation Prices and Bidding Behavior in OCS Drainage Auctions," Discussion Papers 807, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    2. Ashenfelter, Orley, 1989. "How Auctions Work for Wine and Art," Journal of Economic Perspectives, American Economic Association, vol. 3(3), pages 23-36, Summer.
    3. Milgrom, Paul R & Weber, Robert J, 1982. "A Theory of Auctions and Competitive Bidding," Econometrica, Econometric Society, vol. 50(5), pages 1089-1122, September.
    4. Paul Milgrom & Robert Weber, 1981. "Distributional Strategies for Games with Incomplete Information," Discussion Papers 428R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    5. Robert B. Wilson, 1967. "Competitive Bidding with Asymmetric Information," Management Science, INFORMS, vol. 13(11), pages 816-820, July.
    6. Hendricks, Kenneth & Porter, Robert H, 1988. "An Empirical Study of an Auction with Asymmetric Information," American Economic Review, American Economic Association, vol. 78(5), pages 865-83, December.
    7. Engelbrecht-Wiggans, Richard & Milgrom, Paul R. & Weber, Robert J., 1983. "Competitive bidding and proprietary information," Journal of Mathematical Economics, Elsevier, vol. 11(2), pages 161-169, April.
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    Cited by:
    1. Roosen J. & Hennessy D.A., 2004. "Testing for the Monotone Likelihood Ratio Assumption," Journal of Business & Economic Statistics, American Statistical Association, vol. 22, pages 358-366, July.
    2. Christopher J. Mayer, 1993. "A model of real estate auctions versus negotiated sales," Working Papers 93-3, Federal Reserve Bank of Boston.
    3. Christopher J. Meyer, 1993. "Assessing the performance of real estate auctions," Working Papers 93-1, Federal Reserve Bank of Boston.

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