The Optimality of Being Efficient

29 Pages Posted: 26 Jul 1999

See all articles by Lawrence M. Ausubel

Lawrence M. Ausubel

University of Maryland - Department of Economics

Peter Cramton

University of Maryland - Department of Economics

Date Written: June 1999

Abstract

This paper provides a new defense for emphasizing efficient auction design rather than optimal auction design. Because in auction markets followed by perfect resale, it is optimal to be efficient.

In an optimal auction, a revenue-optimizing seller often awards goods inefficiently, either by placing them in the wrong hands or by withholding them from the market. This conclusion rests on two assumptions: (1) the seller can prevent resale among bidders after the auction, and (2) the seller can commit to not selling the withheld goods after the auction.

Ausubel and Cramton examine how the optimal auction problem changes when those assumptions are relaxed. In sharp contrast to the no-resale assumption, they assume perfect resale: all gains from trade are exhausted in resale. In a multiple-object model with independent signals, they characterize optimal auctions with resale. They prove generally that with perfect resale, the seller can do no better than assign goods efficiently. Moreover, any misassignment of goods strictly lowers the seller`s revenue from the optimum. In auction markets followed by perfect resale, it is optimal to be efficient.

The authors' results provide a new defense for emphasizing efficient auction design rather than optimal auction design. The presence of a perfect resale market forces even the most selfish seller, whose sole objective is maximizing revenues, to focus-out of necessity-on efficiency. Given the vast and active resale market in Treasury securities, it seems safe to assert that the model with perfect resale is a better description of the U.S. Treasury market than the model without any resale-so its predictions ought to be taken more seriously.

This paper - a product of the Private Participation in Infrastructure Division, Private Sector Development Department - is part of a larger effort in the department to study issues arising from private participation in infrastructure. The study was funded by the Bank's Research Support Budget under the research project Auctions in Infrastructure (RPO 682-58). The authors may be contacted at ausubel@econ.umd.edu or peter@cramton.umd.edu.

JEL Classification: D44

Suggested Citation

Ausubel, Lawrence M. and Cramton, Peter C., The Optimality of Being Efficient (June 1999). University of Maryland; World Bank Policy Research Working Paper No. 1985. Available at SSRN: https://ssrn.com/abstract=169768

Lawrence M. Ausubel

University of Maryland - Department of Economics ( email )

Tydings Hall
College Park, MD 20742
United States
301-405-3495 (Phone)
301-405-3542 (Fax)

Peter C. Cramton (Contact Author)

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States
301-405-6987 (Phone)
301-405-3542 (Fax)

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