The Variable Value Environment: Auctions and Actions

26 Pages Posted: 11 Apr 2001

See all articles by Michael A. Schwarz

Michael A. Schwarz

Microsoft

Konstantin Sonin

University of Chicago - Harris School of Public Policy; Higher School of Economics; Centre for Economic Policy Research (CEPR)

Date Written: October 2005

Abstract

We model an environment, where bidders' private values may change over time as a result of both costly private actions and exogenous shocks. Examples of private actions include investment and entry decisions; shocks might be due to exogenous changes in a potential buyer's circumstances. We describe an efficient auction mechanism that maximizes the final value of the object to the winning bidder net of the total cost of investment by all agents. In particular, we show that, assuming that the auctioneer does not have full commitment power, costly signalling is necessary for efficient entry when agents receive private information both before and after they make the entry decision. To rule out pooling equilibria that coexist with the efficient equilibrium in the basic mechanism, we introduce a virtual-implementation-style mechanism that (i) is almost efficient; (ii) forces players to coordinate on the separating equilibrium; and (iii) is simple enough to be potentially useful in practice.

Keywords: auctions, efficient mechanism design

JEL Classification: D80, D44

Suggested Citation

Schwarz, Michael A. and Sonin, Konstantin, The Variable Value Environment: Auctions and Actions (October 2005). Harvard Institute of Economic Research, Research Paper Series, Forthcoming, Available at SSRN: https://ssrn.com/abstract=266549 or http://dx.doi.org/10.2139/ssrn.266549

Michael A. Schwarz (Contact Author)

Microsoft ( email )

2140 Shattuck Ave
Berkeley, CA 94704
United States

Konstantin Sonin

University of Chicago - Harris School of Public Policy ( email )

1155 East 60th Street
Chicago, IL 60637
United States

Higher School of Economics ( email )

20 Myasnitskaya street
Moscow, 119017
Russia

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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