Common Values, Unobserved Heterogeneity, and Endogenous Entry in U.S. Offshore Oil Lease Auctions

81 Pages Posted: 16 Jul 2018

See all articles by Giovanni Compiani

Giovanni Compiani

University of Chicago Booth School of Business

Philip A. Haile

Yale University - Department of Economics; National Bureau of Economic Research (NBER); Yale University - Cowles Foundation

Marcelo Sant'Anna

Faculdade de Direito de Vitória (FDV)

Multiple version iconThere are 2 versions of this paper

Date Written: June 29, 2018

Abstract

An oil lease auction is the classic example motivating a common values model. However, formal testing for common values has been hindered by unobserved auction-level heterogeneity, which is likely to affect both participation in an auction and bidders' willingness to pay. We develop and apply an empirical approach for first-price sealed bid auctions with affiliated values, unobserved heterogeneity, and endogenous bidder entry. The approach also accommodates spatial dependence and sample selection. Following Haile, Hong and Shum (2003), we specify a reduced form for bidder entry outcomes and rely on an instrument for entry. However, we relax their control function requirements and demonstrate that our specification is generated by a fully specified game motivated by our application. We show that important features of the model are nonparametrically identified and propose a semiparametric estimation approach designed to scale well to the moderate sample sizes typically encountered in practice. Our empirical results show that common values, affiliated private information, and unobserved heterogeneity - three distinct phenomena with different implications for policy and empirical work - are all present and important in U.S. offshore oil and gas lease auctions. We find that ignoring unobserved heterogeneity in the empirical model obscures the presence of common values. We also examine the interaction between affiliation, the winner's curse, and the number of bidders in determining the aggressiveness of bidding and seller revenue.

Suggested Citation

Compiani, Giovanni and Haile, Philip A. and Sant'Anna, Marcelo, Common Values, Unobserved Heterogeneity, and Endogenous Entry in U.S. Offshore Oil Lease Auctions (June 29, 2018). Cowles Foundation Discussion Paper No. 2137, Available at SSRN: https://ssrn.com/abstract=3206668 or http://dx.doi.org/10.2139/ssrn.3206668

Giovanni Compiani

University of Chicago Booth School of Business ( email )

Chicago, IL
United States

Philip A. Haile (Contact Author)

Yale University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Yale University - Cowles Foundation

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Marcelo Sant'Anna

Faculdade de Direito de Vitória (FDV)

Brazil

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