IDEAS home Printed from https://ideas.repec.org/p/ehl/lserod/128285.html
   My bibliography  Save this paper

Underbidding for oil and gas tracts

Author

Listed:
  • Martin, Julien
  • Pesendorfer, Martin
  • Shannon, Jack

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

  • Martin, Julien & Pesendorfer, Martin & Shannon, Jack, 2025. "Underbidding for oil and gas tracts," LSE Research Online Documents on Economics 128285, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:128285
    as

    Download full text from publisher

    File URL: http://eprints.lse.ac.uk/128285/
    File Function: Open access version.
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Ryan Kellogg, 2014. "The Effect of Uncertainty on Investment: Evidence from Texas Oil Drilling," American Economic Review, American Economic Association, vol. 104(6), pages 1698-1734, June.
    2. Evan Herrnstadt & Ryan Kellogg & Eric Lewis, 2024. "Drilling Deadlines and Oil and Gas Development," Econometrica, Econometric Society, vol. 92(1), pages 29-60, January.
    3. Pindyck, Robert S, 1991. "Irreversibility, Uncertainty, and Investment," Journal of Economic Literature, American Economic Association, vol. 29(3), pages 1110-1148, September.
    4. Nathan H. Miller & Gloria Sheu & Matthew C. Weinberg, 2021. "Oligopolistic Price Leadership and Mergers: The United States Beer Industry," American Economic Review, American Economic Association, vol. 111(10), pages 3123-3159, October.
    5. Matthews, Steven A., 1983. "Selling to risk averse buyers with unobservable tastes," Journal of Economic Theory, Elsevier, vol. 30(2), pages 370-400, August.
    6. Vivek Bhattacharya & Andrey Ordin & James W. Roberts, 2022. "Bidding and Drilling under Uncertainty: An Empirical Analysis of Contingent Payment Auctions," Journal of Political Economy, University of Chicago Press, vol. 130(5), pages 1319-1363.
    7. Elie Tamer, 2003. "Incomplete Simultaneous Discrete Response Model with Multiple Equilibria," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(1), pages 147-165.
    8. Christopher Avery, 1998. "Strategic Jump Bidding in English Auctions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 65(2), pages 185-210.
    9. Robert H. Porter & J. Douglas Zona, 1999. "Ohio School Milk Markets: An Analysis of Bidding," RAND Journal of Economics, The RAND Corporation, vol. 30(2), pages 263-288, Summer.
    10. Jonathan B. Berk, 2004. "Valuation and Return Dynamics of New Ventures," The Review of Financial Studies, Society for Financial Studies, vol. 17(1), pages 1-35.
    11. Hendricks, Kenneth & Porter, Robert H & Boudreau, Bryan, 1987. "Information, Returns, and Bidding Behavior in OCS Auctions: 1954-1969," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 517-542, June.
    12. Sylvain Chassang & Kei Kawai & Jun Nakabayashi & Juan Ortner, 2022. "Robust Screens for Noncompetitive Bidding in Procurement Auctions," Econometrica, Econometric Society, vol. 90(1), pages 315-346, January.
    13. Green, Edward J & Porter, Robert H, 1984. "Noncooperative Collusion under Imperfect Price Information," Econometrica, Econometric Society, vol. 52(1), pages 87-100, January.
    14. Yunmi Kong, 2020. "Not knowing the competition: evidence and implications for auction design," RAND Journal of Economics, RAND Corporation, vol. 51(3), pages 840-867, September.
    15. Elena Krasnokutskaya, 2011. "Identification and Estimation of Auction Models with Unobserved Heterogeneity," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 78(1), pages 293-327.
    16. Froot, Kenneth A & Scharfstein, David S & Stein, Jeremy C, 1993. "Risk Management: Coordinating Corporate Investment and Financing Policies," Journal of Finance, American Finance Association, vol. 48(5), pages 1629-1658, December.
    17. Patrick Bajari & Lixin Ye, 2003. "Deciding Between Competition and Collusion," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 971-989, November.
    18. Kei Kawai & Jun Nakabayashi, 2022. "Detecting Large-Scale Collusion in Procurement Auctions," Journal of Political Economy, University of Chicago Press, vol. 130(5), pages 1364-1411.
    19. Timothy G. Conley & Francesco Decarolis, 2016. "Detecting Bidders Groups in Collusive Auctions," American Economic Journal: Microeconomics, American Economic Association, vol. 8(2), pages 1-38, May.
    20. Yunmi Kong, 2021. "Sequential Auctions with Synergy and Affiliation across Auctions," Journal of Political Economy, University of Chicago Press, vol. 129(1), pages 148-181.
    21. Joseph E. Harrington, 2005. "Optimal Cartel Pricing In The Presence Of An Antitrust Authority," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(1), pages 145-169, February.
    22. Kei Kawai & Jun Nakabayashi & Juan Ortner & Sylvain Chassang, 2023. "Using Bid Rotation and Incumbency to Detect Collusion: A Regression Discontinuity Approach," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 90(1), pages 376-403.
    23. Porter, Robert H & Zona, J Douglas, 1993. "Detection of Bid Rigging in Procurement Auctions," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 518-538, June.
    24. John Asker, 2010. "A Study of the Internal Organization of a Bidding Cartel," American Economic Review, American Economic Association, vol. 100(3), pages 724-762, June.
    25. Martin Pesendorfer, 2000. "A Study of Collusion in First-Price Auctions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 67(3), pages 381-411.
    26. Maskin, Eric S & Riley, John G, 1984. "Optimal Auctions with Risk Averse Buyers," Econometrica, Econometric Society, vol. 52(6), pages 1473-1518, November.
    27. Robert Wilson, 1977. "A Bidding Model of Perfect Competition," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 44(3), pages 511-518.
    28. El Hadi Caoui, 2022. "A Study of Umbrella Damages from Bid Rigging," Journal of Law and Economics, University of Chicago Press, vol. 65(2), pages 239-277.
    29. Yunmi Kong & Isabelle Perrigne & Quang Vuong, 2022. "Multidimensional Auctions of Contracts: An Empirical Analysis," American Economic Review, American Economic Association, vol. 112(5), pages 1703-1736, May.
    30. Milgrom, Paul R & Weber, Robert J, 1982. "A Theory of Auctions and Competitive Bidding," Econometrica, Econometric Society, vol. 50(5), pages 1089-1122, September.
    31. Paulo Somaini, 2020. "Identification in Auction Models with Interdependent Costs," Journal of Political Economy, University of Chicago Press, vol. 128(10), pages 3820-3871.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lu, Jiaxuan, 2023. "The economics of China’s between-city height competition: A regression discontinuity approach," Regional Science and Urban Economics, Elsevier, vol. 100(C).
    2. Bruno Baránek & Leon Musolff & Vitezslav Titl, 2025. "Detection of Collusive Networks in Multistage Auctions," CESifo Working Paper Series 12073, CESifo.
    3. Robert Clark & Decio Coviello & Jean-Fran�ois Gauthier & Art Shneyerov, 2018. "Bid Rigging and Entry Deterrence in Public Procurement: Evidence from an Investigation into Collusion and Corruption in Quebec," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 34(3), pages 301-363.
    4. Granlund, David & Rudholm, Niklas, 2023. "Calculating the probability of collusion based on observed price patterns," Umeå Economic Studies 1014, Umeå University, Department of Economics, revised 13 Oct 2023.
    5. Gabrielli, M. Florencia & Willington, Manuel, 2023. "Estimating damages from bidding rings in first-price auctions," Economic Modelling, Elsevier, vol. 126(C).
    6. de Leverano, Adriano, 2019. "Collusion through market sharing agreements: Evidence from Quebec's road paving market," ZEW Discussion Papers 19-053, ZEW - Leibniz Centre for European Economic Research.
    7. David Imhof & Emanuel W Viklund & Martin Huber, 2025. "Catching Bid-rigging Cartels with Graph Attention Neural Networks," Papers 2507.12369, arXiv.org, revised Jul 2025.
    8. Hannes Wallimann & David Imhof & Martin Huber, 2023. "A Machine Learning Approach for Flagging Incomplete Bid-Rigging Cartels," Computational Economics, Springer;Society for Computational Economics, vol. 62(4), pages 1669-1720, December.
    9. Clark, Robert & Coviello, Decio & de Leverano, Adriano, 2020. "Complementary bidding and the collusive arrangement: Evidence from an antitrust investigation," ZEW Discussion Papers 20-052, ZEW - Leibniz Centre for European Economic Research.
    10. Johannes Wachs & J'anos Kert'esz, 2019. "A network approach to cartel detection in public auction markets," Papers 1906.08667, arXiv.org.
    11. Aaltio, Aapo & Buri, Riku & Jokelainen, Antto & Lundberg, Johan, 2025. "Complementary bidding and cartel detection: Evidence from Nordic asphalt markets," International Journal of Industrial Organization, Elsevier, vol. 98(C).
    12. Tatyana Deryugina & Alminas Žaldokas & Anastassia Fedyk & Yuriy Gorodnichenko & James Hodson & Ilona Sologoub, 2025. "Rating Government Procurement Markets," NBER Working Papers 34479, National Bureau of Economic Research, Inc.
    13. Sylvain Chassang & Juan Ortner, 2019. "Collusion in Auctions with Constrained Bids: Theory and Evidence from Public Procurement," Journal of Political Economy, University of Chicago Press, vol. 127(5), pages 2269-2300.
    14. Huber, Martin & Imhof, David, 2023. "Flagging cartel participants with deep learning based on convolutional neural networks," International Journal of Industrial Organization, Elsevier, vol. 89(C).
    15. Robert Clark & Ignatius Horstmann & Jean-François Houde, 2021. "Hub and Spoke Cartels: Theory and Evidence from the Grocery Industry," NBER Working Papers 29253, National Bureau of Economic Research, Inc.
    16. Sylvain Chassang & Kei Kawai & Jun Nakabayashi & Juan Ortner, 2019. "Data Driven Regulation: Theory and Application to Missing Bids," Boston University - Department of Economics - Working Papers Series WP2019-04, Boston University - Department of Economics.
    17. Cerrone, Claudia & Hermstrüwer, Yoan & Robalo, Pedro, 2021. "Debarment and collusion in procurement auctions," Games and Economic Behavior, Elsevier, vol. 129(C), pages 114-143.
    18. Silveira, Douglas & de Moraes, Lucas B. & Fiuza, Eduardo P.S. & Cajueiro, Daniel O., 2023. "Who are you? Cartel detection using unlabeled data," International Journal of Industrial Organization, Elsevier, vol. 88(C).
    19. Joseph E. Harrington, Jr, 2005. "Detecting Cartels," Economics Working Paper Archive 526, The Johns Hopkins University,Department of Economics.
    20. Lamy, Laurent, 2012. "The econometrics of auctions with asymmetric anonymous bidders," Journal of Econometrics, Elsevier, vol. 167(1), pages 113-132.

    More about this item

    Keywords

    ;
    ;
    ;

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ehl:lserod:128285. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: LSERO Manager (email available below). General contact details of provider: https://edirc.repec.org/data/lsepsuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.