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The Variable Value Environment: Auctions and Actions

  • Michael Schwarz
  • Konstantin Sonin

This paper introduces and formally models the variable value environment and proposes an auction mechanism appropriate for it. In the variable value environment, bidders’ private values may change over time as a result of both private actions and exogenous shocks. Examples of private actions and exogenous shocks are complementary investments and exogenous changes in bidder's business, respectively. We consider a three-period model of the variable value environment where agents receive signals about their values in the first and the third periods and in the second period they take actions. This setting captures essential features of auctions of objects available for use at a future date (e. g. , a sale of a military base scheduled to close in a few years). We study mechanisms that lead to efficient allocations, i. e. those in which the final value of the object to the winning bidder net of the total cost of private actions undertaken by all agents is maximized. We characterize the first best allocation, and propose a mechanism that yields the first best allocation in equilibrium. This mechanism has an inefficient pooling equilibrium along with an efficient separating equilibrium. To rule out the pooling equilibrium, we introduce a class of e -efficient mechanisms that force players to coordinate on the separating equilibrium. We prove that one can always choose an e -efficient mechanism that yields an efficient allocation with probability arbitrarily close to one.

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File URL: http://www.economics.harvard.edu/pub/hier/2001/HIER1918.pdf
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Paper provided by Harvard - Institute of Economic Research in its series Harvard Institute of Economic Research Working Papers with number 1918.

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Date of creation: 2001
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Handle: RePEc:fth:harver:1918
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  1. Levin, Dan & Smith, James L, 1994. "Equilibrium in Auctions with Entry," American Economic Review, American Economic Association, vol. 84(3), pages 585-99, June.
  2. Klemperer, Paul, 1999. "Auction Theory: a Guide to the Literature," CEPR Discussion Papers 2163, C.E.P.R. Discussion Papers.
  3. Paul Klemperer & Jeremy Bulow, 1998. "Toeholds and Takeovers," Economics Series Working Papers 1998-W04, University of Oxford, Department of Economics.
  4. Riordan, Michael H & Sappington, David E M, 1987. "Awarding Monopoly Franchises," American Economic Review, American Economic Association, vol. 77(3), pages 375-87, June.
  5. Haim Levy, 1992. "Stochastic Dominance and Expected Utility: Survey and Analysis," Management Science, INFORMS, vol. 38(4), pages 555-593, April.
  6. Vijay Krishna & Motty Perry, 1997. "Efficient Mechanism Design," Game Theory and Information 9703010, EconWPA, revised 28 Apr 1998.
  7. Athey, Susan, 2001. "Single Crossing Properties and the Existence of Pure Strategy Equilibria in Games of Incomplete Information," Econometrica, Econometric Society, vol. 69(4), pages 861-89, July.
  8. Richard L. Fullerton & R. Preston McAfee, 1999. "Auctioning Entry into Tournaments," Journal of Political Economy, University of Chicago Press, vol. 107(3), pages 573-605, June.
  9. P. Dasgupta & Eric Maskin, 1998. "Efficient Auctions," Harvard Institute of Economic Research Working Papers 1857, Harvard - Institute of Economic Research.
  10. Myerson, Roger B, 1979. "Incentive Compatibility and the Bargaining Problem," Econometrica, Econometric Society, vol. 47(1), pages 61-73, January.
  11. McAfee, R. Preston & McMillan, John, 1987. "Auctions with entry," Economics Letters, Elsevier, vol. 23(4), pages 343-347.
  12. Myerson, Roger B. & Satterthwaite, Mark A., 1983. "Efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, vol. 29(2), pages 265-281, April.
  13. Cho, In-Koo & Kreps, David M, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 179-221, May.
  14. E. Kohlberg & J.-F. Mertens, 1998. "On the Strategic Stability of Equilibria," Levine's Working Paper Archive 445, David K. Levine.
  15. Milgrom, Paul R, 1981. "Rational Expectations, Information Acquisition, and Competitive Bidding," Econometrica, Econometric Society, vol. 49(4), pages 921-43, June.
  16. Maskin, Eric S., 2000. "Auctions, development, and privatization: Efficient auctions with liquidity-constrained buyers," European Economic Review, Elsevier, vol. 44(4-6), pages 667-681, May.
  17. Paul R. Milgrom, 1985. "Auction Theory," Cowles Foundation Discussion Papers 779, Cowles Foundation for Research in Economics, Yale University.
  18. Paul Milgrom & Robert J. Weber, 1981. "A Theory of Auctions and Competitive Bidding," Discussion Papers 447R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  19. Milgrom, Paul & Shannon, Chris, 1994. "Monotone Comparative Statics," Econometrica, Econometric Society, vol. 62(1), pages 157-80, January.
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