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Common Values, Unobserved Heterogeneity, and Endogenous Entry in U.S. Offshore Oil Lease Auctions

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In a "common values" environment, some market participants have private information relevant to others' assessments of their own valuations or costs. Economic theory shows that this type of informational asymmetry can have important implications for market performance and market design. Yet even for the classic example of an oil lease auction, formal evidence on the presence and strength of common values has been limited by the problem of auction-level unobserved heterogeneity that is likely to affect both participation in an auction and bidders' willingness to pay. Here we develop an empirical approach for first-price sealed bid auctions with affiliated values, unobserved heterogeneity, and endogenous bidder entry. We show that important features of the model are nonparametrically identified and apply a semiparametric estimation approach to data from U.S. offshore oil and gas lease auctions. Our empirical results show that common values, affiliated private information, and unobserved heterogeneity - three distinct phenomena with different implications for policy and empirical work - are all present. Failing to account for unobserved heterogeneity obscures the empirical evidence of common values. We examine the implications of our estimates for the classic revenue ranking of sealed bid auction designs, and for the interaction between affiliation, the winner's curse, and the number of bidders in determining the aggressiveness of bidding and seller revenue.

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  • Giovanni Compiani & Philip A. Haile & Marcelo Sant'Anna, 2018. "Common Values, Unobserved Heterogeneity, and Endogenous Entry in U.S. Offshore Oil Lease Auctions," Cowles Foundation Discussion Papers 2137R, Cowles Foundation for Research in Economics, Yale University, revised Jun 2019.
  • Handle: RePEc:cwl:cwldpp:2137r
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    1. Ali Hortaçsu & Jakub Kastl, 2012. "Valuing Dealers' Informational Advantage: A Study of Canadian Treasury Auctions," Econometrica, Econometric Society, vol. 80(6), pages 2511-2542, November.
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    6. Tong Li & Xiaoyong Zheng, 2009. "Entry and Competition Effects in First-Price Auctions: Theory and Evidence from Procurement Auctions," Review of Economic Studies, Oxford University Press, vol. 76(4), pages 1397-1429.
    7. Hubbard, Timothy P. & Li, Tong & Paarsch, Harry J., 2012. "Semiparametric estimation in models of first-price, sealed-bid auctions with affiliation," Journal of Econometrics, Elsevier, vol. 168(1), pages 4-16.
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    Cited by:

    1. Cristián Hernández & Daniel Quint & Christopher Turansick, 2020. "Estimation in English auctions with unobserved heterogeneity," RAND Journal of Economics, RAND Corporation, vol. 51(3), pages 868-904, September.

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