Efficiency and information aggregation in auctions with costly information

Consider an auction in which k identical objects are sold to n > k bidders who each have a value for one object which can have both private and common components to it. Private information concerning the common component of the object is not exogenously given, but rather endogenous and bidders face a cost to becoming informed. If the cost of information is not prohibitively high, then the equilibrium price in a uniform price auction will not aggregate private information, in contrast to the costless information case. Moreover, for a wide class of auctions if the cost of information is not prohibitively high then the objects can only be allocated in a weakly efficient sense, and then only if the equilibrium proportion of endogenously informed agents is vanishing as the economy grows. In spite of these results, it is shown that there is a mechanism for which there exist equilibria and for which (weak) efficiency is achieved as the economy grows in the face of endogenous information acquisition.Received: 6 August 2001, Accepted: 27 July 2002, JEL Classification: C72, D44, D82Financial support under NSF grant SBR-9507912 is gratefully acknowledged. I thank Valentina Bali for conversations out of which this project grew, and Larry Ausubel for a very helpful discussion of an early version of this paper at the 1998 summer meetings of the Econometric Society from which I have borrowed in structuring the exposition of the paper. I also thank Andy Postlewaite, Jeroen Swinkels, and an associate editor and anonymous referee for helpful comments and suggestions on earlier drafts.