All-Pay Auctions with Affiliated Values

50 Pages Posted: 8 Sep 2017

See all articles by Chang-Koo Chi

Chang-Koo Chi

Norwegian School of Economics (NHH) - Department of Economics

Pauli Murto

Helsinki School of Economics & Business Administration

Juuso Valimaki

Helsinki School of Economics; University of Southampton - Division of Economics

Date Written: June 17, 2017

Abstract

This paper analyzes all-pay auctions where the bidders have affiliated values for the object for sale and where the signals take binary values. Since signals are correlated, high signals indicate a high degree of competition in the auction and since even losing bidders must pay their bid, non-monotonic equilibria arise. We show that the game has a unique symmetric equilibrium, and that whenever the equilibrium is non-monotonic the contestants earn no rents. All-pay auctions result in low expected rents to the bidders, but also induce inefficient allocations in models with affiliated private values. With two bidders, the effect on rent extraction dominates, and all-pay auction outperforms standard auctions in terms of expected revenue. With many bidders, this revenue ranking is reversed for some parameter values and the inefficient allocations persist even in large auctions.

Keywords: All-Pay Auctions, Common Values, Affiliated Signals

JEL Classification: D44, D82

Suggested Citation

Chi, Chang-Koo and Murto, Pauli and Valimaki, Juuso, All-Pay Auctions with Affiliated Values (June 17, 2017). NHH Dept. of Economics Discussion Paper No. 13/2017, Available at SSRN: https://ssrn.com/abstract=3033781 or http://dx.doi.org/10.2139/ssrn.3033781

Chang-Koo Chi (Contact Author)

Norwegian School of Economics (NHH) - Department of Economics ( email )

Helleveien 30
N-5035 Bergen
Norway

Pauli Murto

Helsinki School of Economics & Business Administration ( email )

P.O. Box 21210
Helsinki 00100, 00101
Finland

Juuso Valimaki

Helsinki School of Economics ( email )

P.O. Box 21210
Helsinki 00100, 00101
Finland

University of Southampton - Division of Economics ( email )

Southampton, SO17 1BJ
United Kingdom
+44 23 8059 3263 (Phone)

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