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on Economic Design |
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Issue of 2019‒02‒18
four papers chosen by Guillaume Haeringer, Baruch College and Alex Teytelboym, University of Oxford |
| By: | Giovanni Compiani (Institute for Fiscal Studies); Phil Haile (Institute for Fiscal Studies and Yale University); Marcelo Sant'Anna (Institute for Fiscal Studies) |
| Abstract: | An oil lease auction is the classic example motivating a common values model. However, formal testing for common values has been hindered by unobserved auction-level heterogeneity, which is likely to affect both participation in an auction and bidders' willingness to pay. We develop and apply an empirical approach for fi rst-price sealed bid auctions with affiliated values, unobserved heterogeneity, and endogenous bidder entry. The approach also accommodates spatial dependence and sample selection. Following Haile, Hong and Shum (2003), we specify a reduced form for bidder entry outcomes and rely on an instrument for entry. However, we relax their control function requirements and demonstrate that our specifi cation is generated by a fully speci fied game motivated by our application. We show that important features of the model are nonparametrically identifi ed and propose a semiparametric estimation approach designed to scale well to the moderate sample sizes typically encountered in practice. 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 and important in U.S. offshore oil and gas lease auctions. We find that ignoring unobserved heterogeneity in the empirical model obscures the presence of common values. We also examine the interaction between affiliation, the winner's curse, and the number of bidders in determining the aggressiveness of bidding and seller revenue. |
| Date: | 2018–07–03 |
| URL: | http://d.repec.org/n?u=RePEc:ifs:cemmap:37/18&r=all |
| By: | Nicholas Ryan (Cowles Foundation, Yale University) |
| Abstract: | Weak contract enforcement may reduce the efficiency of investment in developing countries. I study how contract enforcement affects efficiency in procurement auctions for the largest power projects in India. I gather data on bidding and ex post contract renegotiation and find that the renegotiation of contracts in response to cost shocks is widespread, despite that bidders are allowed to index their bids to future costs like the price of coal. Connected firms choose to index less of the value of their bids to coal prices and, through this strategy, expose themselves to cost shocks to induce renegotiation. I use a structural model of bidding in a scoring auction to characterize equilibrium bidding when bidders are heterogeneous both in cost and in the payments they expect after renegotiation. The model estimates show that bidders offer power below cost due to the expected value of later renegotiation. The model is used to simulate bidding and efficiency with strict contract enforcement. Contract enforcement is found to be pro-competitive. With no renegotiation, equilibrium bids would rise to cover cost, but markups relative to total contract value fall sharply. Production costs decline, due to projects being allocated to lower-cost bidders over those who expect larger payments in renegotiation. |
| Keywords: | Contracting, Procurement, Commitment |
| JEL: | O25 L94 L14 D44 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:2164&r=all |
| By: | Serafin J. Grundl; Yu Zhu |
| Abstract: | In laboratory experiments bidding in first-price auctions is more aggressive than predicted by the risk-neutral Bayesian Nash Equilibrium (RNBNE) - a finding known as the overbidding puzzle. Several models have been proposed to explain the overbidding puzzle, but no canonical alternative to RNBNE has emerged, and RNBNE remains the basis of the structural auction literature. Instead of estimating a particular model of overbidding, we use the overbidding restriction itself for identification, which allows us to bound the valuation distribution, the seller's payoff function, and the optimal reserve price. These bounds are consistent with RNBNE and all models of overbidding and remain valid if different bidders employ different bidding strategies. We propose simple estimators and evaluate the validity of the bounds numerically and in experimental data. |
| Keywords: | Experimental findings ; First-price auction ; Partial identification ; Robust inference ; Structural estimation |
| JEL: | C14 D44 |
| Date: | 2019–02–07 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2019-06&r=all |
| By: | Teresa Estañ (Centro de Investigación Operativa (CIO), Universidad Miguel Hernández de Elche.); Natividad Llorca (Centro de Investigación Operativa (CIO), Universidad Miguel Hernández de Elche.); Ricardo Martínez (Department of Economic Theory and Economic History, University of Granada.); Joaquín Sánchez-Soriano (Centro de Investigación Operativa (CIO), Universidad Miguel Hernández de Elche..) |
| Abstract: | In this study, we consider different cities located along a tram line. Each city may have one or several stations and information is available about the flow of passengers between any pair of stations. A fixed cost (salaries of the executive staff, repair facilities, or fixed taxes) must be divided among the cities. This cost is independent of the number of passengers and the length of the line. We propose a mathematical model to identify suitable mechanisms for sharing the fixed cost. In the proposed model, we propose, and characterize axiomatically, three rules, which include the uniform split, the proportional allocation and a intermediate situation. The analyzed axioms represent the basic requirements for fairness and elemental properties of stability. |
| Keywords: | axiom, cost game, cost sharing, fairness, transport networks. |
| Date: | 2019–02–05 |
| URL: | http://d.repec.org/n?u=RePEc:gra:wpaper:19/03&r=all |