Licensed to Deal: Auction Design for Market Creation in a Low-Income Country

We study the design of auctions in a low-income country where business licenses for new markets are auctioned to private firms. The field experiment varies two auction design choices: the auction mechanism and the type of information provided to bidders. The results suggest that: i) open auctions, in which bidders implicitly share information with their peers, have up to 61 percent lower mean bid prices and up to 67 percent lower bid variance than closed auctions, in which bidders bid secretly; ii) bidding behavior is influenced by the pre-bid license information provided by the auctioneer as much as by bidders’ ex-ante beliefs; and iii) auctions with real stakes reduce bids by a factor of five relative to non-incentivized auctions. These results underscore the importance of auction design for pricing innovations and the challenges inherent in creating markets in low-income countries where returns to innovations are highly uncertain.