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Underbidding for Oil and Gas Tracts

Author

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  • Julien Martin
  • Martin Pesendorfer
  • Jack Shannon

Abstract

Common values auction models, where bidder decisions depend on noisy signals of common values, provide predictions about Bayesian Nash equilibrium (BNE) outcomes. In settings where these common values can be estimated, these predictions can be tested. We propose a series of tests, robust to assumptions about the signal structure, to determine whether the observed data could have been generated by a Bayesian Nash equilibrium. In the setting of oil and gas lease auctions in New Mexico, we find evidence that participation decisions are correlated and that participants systematically underbid in light of ex post outcomes.

Suggested Citation

  • Julien Martin & Martin Pesendorfer & Jack Shannon, 2025. "Underbidding for Oil and Gas Tracts," American Economic Review, American Economic Association, vol. 115(8), pages 2755-2780, August.
    • Handle: RePEc:aea:aecrev:v:115:y:2025:i:8:p:2755-80
    DOI: 10.1257/aer.20231356
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    More about this item

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L71 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Mining, Extraction, and Refining: Hydrocarbon Fuels
    • Q35 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Hydrocarbon Resources

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