IDEAS home Printed from https://ideas.repec.org/p/fth/harver/1918.html
   My bibliography  Save this paper

The Variable Value Environment: Auctions and Actions

Author

Listed:
  • Michael Schwarz
  • Konstantin Sonin

Abstract

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.

Suggested Citation

  • Michael Schwarz & Konstantin Sonin, 2001. "The Variable Value Environment: Auctions and Actions," Harvard Institute of Economic Research Working Papers 1918, Harvard - Institute of Economic Research.
  • Handle: RePEc:fth:harver:1918
    as

    Download full text from publisher

    File URL: http://www.economics.harvard.edu/pub/hier/2001/HIER1918.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Paul R. Milgrom, 1985. "Auction Theory," Cowles Foundation Discussion Papers 779, Cowles Foundation for Research in Economics, Yale University.
    2. Jeremy Bulow & Ming Huang & Paul Klemperer, 1999. "Toeholds and Takeovers," Journal of Political Economy, University of Chicago Press, vol. 107(3), pages 427-454, June.
    3. Milgrom, Paul R, 1981. "Rational Expectations, Information Acquisition, and Competitive Bidding," Econometrica, Econometric Society, vol. 49(4), pages 921-943, June.
    4. McAfee, R. Preston & McMillan, John, 1987. "Auctions with entry," Economics Letters, Elsevier, vol. 23(4), pages 343-347.
    5. Myerson, Roger B, 1979. "Incentive Compatibility and the Bargaining Problem," Econometrica, Econometric Society, vol. 47(1), pages 61-73, January.
    6. Myerson, Roger B. & Satterthwaite, Mark A., 1983. "Efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, vol. 29(2), pages 265-281, April.
    7. Klemperer, Paul, 1999. " Auction Theory: A Guide to the Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 13(3), pages 227-286, July.
    8. In-Koo Cho & David M. Kreps, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 179-221.
    9. 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.
    10. 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.
    11. Milgrom, Paul & Shannon, Chris, 1994. "Monotone Comparative Statics," Econometrica, Econometric Society, vol. 62(1), pages 157-180, January.
    12. Kohlberg, Elon & Mertens, Jean-Francois, 1986. "On the Strategic Stability of Equilibria," Econometrica, Econometric Society, vol. 54(5), pages 1003-1037, September.
    13. Vijay Krishna & Motty Perry, 1997. "Efficient Mechanism Design," Game Theory and Information 9703010, EconWPA, revised 28 Apr 1998.
    14. Milgrom, Paul R & Weber, Robert J, 1982. "A Theory of Auctions and Competitive Bidding," Econometrica, Econometric Society, vol. 50(5), pages 1089-1122, September.
    15. Haim Levy, 1992. "Stochastic Dominance and Expected Utility: Survey and Analysis," Management Science, INFORMS, vol. 38(4), pages 555-593, April.
    16. Partha Dasgupta & Eric Maskin, 2000. "Efficient Auctions," The Quarterly Journal of Economics, Oxford University Press, vol. 115(2), pages 341-388.
    17. Levin, Dan & Smith, James L, 1994. "Equilibrium in Auctions with Entry," American Economic Review, American Economic Association, vol. 84(3), pages 585-599, June.
    18. 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 861-889, July.
    19. Riordan, Michael H & Sappington, David E M, 1987. "Awarding Monopoly Franchises," American Economic Review, American Economic Association, vol. 77(3), pages 375-387, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Sonin Konstantin, 2004. "Private interest in public tenders: no revenue, no efficiency and no social benefits," EERC Working Paper Series 00-111e, EERC Research Network, Russia and CIS.
    2. Giacomo Calzolari & Alessandro Pavan, 2006. "Monopoly with resale," RAND Journal of Economics, RAND Corporation, vol. 37(2), pages 362-375, June.
    3. Lange, Andreas & List, John A. & Price, Michael K., 2011. "Auctions with resale when private values are uncertain: Evidence from the lab and field," International Journal of Industrial Organization, Elsevier, vol. 29(1), pages 54-64, January.
    4. Michael Schwarz & Sergei Severinov, 2010. "Investment Tournaments: When Should a Rational Agent Put All Eggs in One Basket?," Journal of Labor Economics, University of Chicago Press, vol. 28(4), pages 893-922, October.
    5. Schmöller, Arno, 2010. "Bidding Behavior, Seller Strategies, and the Utilization of Information in Auctions for Complex Goods," Munich Dissertations in Economics 11175, University of Munich, Department of Economics.

    More about this item

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

    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:fth:harver:1918. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Krichel). General contact details of provider: http://edirc.repec.org/data/ieharus.html .

    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 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.