Common values and unobserved heterogeneity in farmland auctions in Germany

In this paper, we test for the existence of a common component in agricultural land auctions in eastern Germany during the price boom 2007-2018 and discuss respective policy implications. Using a large, detailed dataset of auctions, we can rely on professional appraisals of the auctioned good that are privy to the seller to control for unobserved heterogeneity. We derive a new approach to disentangle valuations from observed and unobserved heterogeneity across auctions. For validation purposes we provide several model specifications; based on all models, we strongly reject purely private valuations. Based on the rich identification strategy, we conclude the existence of a common component in these auctions to be very likely. Our results first underline the importance of an adequate model specification to analyze farmland auctions. Second, from a policy perspective, the implied potential for a winner's curse can be seen as a warning sign for the sector.