Unobserved heterogeneity and reserve prices in auctions

This article shows how reserve prices can be used to control for unobserved object heterogeneity to identify and estimate the distribution of bidder values in auctions. Reserve prices are assumed to be monotonic in the realization of unobserved heterogeneity, but not necessarily set optimally. The model is estimated using transaction prices from a used car auction platform to show that the platform enables sellers to capture a large fraction of the potential value from selling their vehicle. Individual sellers benefit mostly from access to a large set of buyers, but the magnitude depends on accounting for unobserved heterogeneity.     

Collusion in uniform-price auctions: experimental evidence and implication for treasury auctions

We provide experimental evidence that nonbinding preplay communicationbetween bidders in auctions of shares facilitates the adoptionof equilibrium strategies: collusive strategies in uniform-priceauctions, and the unique equilibrium in undominated strategiesin discriminatory auctions. When communication between biddersis introduced, clearing prices and auctioneer profits in uniform-priceauctions fall below those observed in discriminatory auctions.This evidence suggests that uniform-price auctions of Treasurysecurities may result in lower revenues than the currently employeddiscriminatory procedure.     

Complements and substitutes in sequential auctions: the case of water auctions

We use data on sequential water auctions to estimate demand when units are complements or substitutes. A sequential English auction model determines the estimating structural equations. When units are complements, one bidder wins all units by paying a high price for the first unit, thus deterring others from bidding on subsequent units. When units are substitutes, different bidders win the units with positive probability, paying prices similar in magnitude. We recover individual demand consistent with this stark pattern of outcomes and confirm it is not collusive but consistent with noncooperative behavior. Demand estimates are biased if one ignores these features.     

Regulating bidder participation in auctions

Regulating bidder participation in auctions can potentially increase efficiency compared to standard auction formats with free entry. We show that the relative performance of two such mechanisms, a standard first‐price auction with free entry and an entry rights auction, depends nonmonotonically on the precision of information that bidders have about their costs prior to deciding whether to participate in a mechanism. As an empirical application, we estimate parameters from first‐price auctions with free entry for bridge‐building contracts in Oklahoma and Texas and predict that an entry rights auction increases efficiency and reduces procurement costs significantly.     

Bounds on revenue distributions in counterfactual auctions with reserve prices

Measuring auction revenues under counterfactual reserve prices or formats requires knowledge of distributions of bidders' values and private signals. This poses a challenge when bids are observed from first‐price, common‐value auctions. I bound counterfactual revenue distributions without imposing parametric restrictions on the model structure. Using data from U.S. municipal bond auctions, I find first‐price and second‐price auctions under optimal reserve prices lead to little improvement in revenues over existing first‐price formats. The number of bidders has a more significant impact on revenues in optimal auctions. I also find invoking an incorrect assumption of private values in counterfactual analyses results in small errors in predicting revenues from optimal second‐price auctions.     

Clearing price distributions in call auctions

We propose a model for price formation in financial markets based on the clearing of a standard call auction with random orders, and verify its validity for prediction of the daily closing price distribution statistically. The model considers random buy and sell orders, placed employing demand- and supply-side valuation distributions; an equilibrium equation then leads to a distribution for clearing price and transacted volume. Bid and ask volumes are left as free parameters, permitting possibly heavy-tailed or very skewed order flow conditions. In highly liquid auctions, the clearing price distribution converges to an asymptotically normal central limit, with mean and variance in terms of supply/demand-valuation distributions and order flow imbalance. By means of simulations, we illustrate the influence of variations in order flow and valuation distributions on price/volume, noting a distinction between high- and low-volume auction price variance. To verify the validity of the model statistically, we predict a year's worth of daily closing price distributions for five constituents of the Eurostoxx 50 index; Kolmogorov–Smirnov statistics and QQ-plots demonstrate with ample statistical significance that the model predicts closing price distributions accurately, and compares favourably with alternative methods of prediction.     

Information feedback in first price auctions

I apply the notion of a self‐confirming equilibrium (SCE) to study how feedback in first price auctions influences bidders' perceptions about their strategic environment, and consequently their bidding behavior. In a private values setting, revealing the two highest bids at the end of each auction is sufficient for bidders to have correct beliefs (justifying the assumption of Nash equilibrium). In contrast, in every symmetric SCE of a symmetric, affiliated, private values model, bidding strategies and revenue are (weakly) higher if only the highest bid is revealed. I also consider interdependent valuations and discuss implications for the empirical auction literature.     

Regulatory learning in failed thrift auctions

We use a sample of failed thrift auctions to examine if regulators learn from early transactions and improve their performance in later transactions. Our findings suggest that experience at failure resolution does not by itself lead to improved regulatory performance. Evidence of regulatory learning is restricted to dealings with repeat acquirers; in cases where an acquiring firm makes abnormal gains, regulators are able to restructure the auction process and eliminate such gains in subsequent acquisitions made by the same acquirers.     

Revenue and optimality in unequal-sized share auctions

This paper analyzes unequal-sized share auctions with symmetric private-value buyers. The property that each buyer can win at most one unit, but variable-sized, makes share auctions situated between single-unit auctions and multiunit auctions. We calculate revenue and optimality of efficient share auctions and discuss how the optimal reserve valuation varies according to risk attitude towards share size.     

Ordering,revenue and anchoring in art auctions

We estimate the effect of ordering by value on revenues in sequential art auctions held by Sotheby's and Christie's. We exploit a pre determined rotation of which of these two houses holds their auction first during auction week in New York City. When the house that goes first has relatively expensive paintings compared to the other house, we find that the sale premium for the week is around 21% higher relative to the mean sale premium, and the fraction of paintings sold during the week is around 11% higher. We provide evidence that this is due to an anchoring effect.     

Global trends in IPO methods: Book building versus auctions with endogenous entry

The U.S. book-building method has become increasingly popular for initial public offerings (IPOs) worldwide over the last decade, whereas sealed-bid IPO auctions have been abandoned in nearly all of the many countries in which they have been tried. I model book building, discriminatory auctions, and uniform price auctions in an environment in which the number of investors and the accuracy of investors’ information are endogenous. Book building lets underwriters manage investor access to shares, allowing them to reduce risk for both issuers and investors and to control spending on information acquisition, thereby limiting either underpricing or aftermarket volatility. Because more control and less risk are beneficial to all issuers, the advantages of book building's allocational flexibility could explain why global patterns of issuer choice are surprisingly consistent. My models also predict that offerings with higher expected underpricing have lower expected aftermarket volatility; that an auction open to large numbers of potential bidders is vulnerable to inaccurate pricing and to fluctuations in the number of bidders; and that both book-built and auctioned IPOs will exhibit partial adjustment to both private and public information.     

On the core of auctions with externalities: stability and fairness

In auctions with externalities, it is well-known that the core can be empty, which is undesirable both in terms of stability and “fairness.” Nevertheless, some auction outcome must be chosen. We separate deviations into two types: deviations by paying more and deviations by refusing to pay. In high-stakes auctions where bidders also care about their reputation, the latter are unlikely to occur, or else can be prevented by legal interventions. In contrast, the former is more undesirable in the sense that the seller and the bidders experience justified envy. We show that the core is nonempty if bidders cannot refuse to pay.     

First‐price auctions with resale and with outcomes robust to bid disclosure

Although there exists a pure separating equilibrium of the two‐bidder first‐price auction with resale when the bids are kept secret, the ratchet effect prevents the existence of such an equilibrium if the bidders are heterogeneous and the bids are fully disclosed. Nevertheless, we construct a behavioral equilibrium under full disclosure that is equivalent to the pure separating equilibrium under no disclosure. Thus, if the bidders follow this equilibrium, the choice of the disclosure regime does not affect the final allocation of the item nor the expected payoffs.     

Bidding behavior in the SNB’s repo auctions

The Swiss National Bank (SNB) provides reserves to market participants via fixed rate tender auctions. We analyze the banks’ bidding behavior and identify the determinants for the decision to participate as well as on the amount to tender. We find that a bank’s bids from the previous day, the amount of maturing repo operations with the SNB as well as the maturing volume on the interbank repo market have for most banks a significant effect. The autonomous factors (government balances at the SNB and currency in circulation) are of only minor importance. A further determinant is the attractiveness of the SNB’s auction rate compared to the prevailing interbank market repo rate. Further, the question is addressed whether the bidding behavior changed in the financial market crisis of 2007/2008. There is little evidence of a systematic change in bidding behavior in the crisis. This results from the fact that the SNB has addressed the volatile demand for reserves in the crisis with overnight fine-tuning operations.     

Mixed strategies in discriminatory divisible‐good auctions

We introduce the concept of an offer distribution function to analyze randomized offer curves in multiunit procurement auctions. We characterize mixed‐strategy Nash equilibria for pay‐as‐bid auctions where demand is uncertain and costs are common knowledge, a setting for which pure‐strategy supply function equilibria typically do not exist. We generalize previous results on mixtures over horizontal offers as in Bertrand‐Edgeworth games and also characterize novel mixtures over partly increasing supply functions. We show that the randomization can cause considerable production inefficiencies.     

Tacit collusion and capacity withholding in repeated uniform price auctions

This article analyzes tacit collusion in infinitely repeated multiunit uniform price auctions in a symmetric oligopoly with capacity‐constrained firms. Under two popular definitions of the uniform price, when each firm sets a price‐quantity pair, perfect collusion with equal sharing of profit is easier to sustain in the uniform price auction than in the corresponding discriminatory auction. Moreover, capacity withholding may be necessary to sustain this outcome. Even when firms may set bids that are arbitrary finite step functions of price‐quantity pairs, in repeated uniform price auctions maximal collusion is attained with simple price‐quantity strategies exhibiting capacity withholding.     

The demand for agricultural land and strategic bidding in auctions

A unique feature of land auctions is that the same land is auctioned twice; first the land is broken into tracts and each tract is auctioned individually. Then, the tracts are reassembled and auctioned as a whole parcel. After the two auctions are completed, the seller chooses the one that generates a higher revenue. The main purpose of this paper is to provide an explanation of why such an auction design is employed to sell farmland. We also show that this feature of land auctions leads to interesting interaction among the bidding strategies of the players in each of the two auction stages.     

Determinants of the bid-to-cover ratio in Eurozone sovereign debt auctions

Building on a unique dataset of Eurozone sovereign debt auctions, this paper analyzes the determinants of their bid-to-cover ratios, which is the most common measure of the outcome of an auction. We find that the secondary market yield on the same maturity instrument, past domestic and foreign bid-to-cover ratios and occasionally the number of primary dealers tend to exert a positive effect on the current bid-to-cover ratio, while the opposite is the case for the supply and the volatility of the yield. The results thus suggest that past information helps to predict the demand in auctions.     

Creditor financing and overbidding in bankruptcy auctions: Theory and tests

We present unique empirical tests for auction overbidding using data from Sweden's auction bankruptcy system. The main creditor (a bank) can neither bid in the auction nor refuse to sell in order to support a minimum price. However, we argue that the bank may increase its expected revenue by financing a bidder in return for a joint bid strategy, and we show that the optimal coalition bid exceeds the bidder's private valuation (overbidding) by an amount that is increasing in the bank's ex ante debt impairment. We find that bank–bidder financing arrangements are common, and our cross-sectional regressions show that winning bids are increasing in the bank-debt impairment as predicted. While, in theory, overbidding may result in the coalition winning against a more efficient rival bidder, our evidence on post-bankruptcy operating performance fails to support such allocative inefficiency effects. We also find that restructurings by bank-financed bidders are relatively risky as they have greater bankruptcy refiling rates, irrespective of the coalition's overbidding incentive.