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

99 Pages Posted: 25 Jun 2019

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 Castello Branco Sant'Anna

FGV EPGE

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Date Written: June 21, 2019

Abstract

In a "common values" environment, some market participants have private information relevant to others' assessments of their own valuations or costs. Economic theory shows that this type of informational asymmetry can have important implications for market performance and market design. Yet even for the classic example of an oil lease auction, formal evidence on the presence and strength of common values has been limited by the problem of auction-level unobserved heterogeneity that is likely to affect both participation in an auction and bidders' willingness to pay. Here we develop an empirical approach for first-price sealed bid auctions with affiliated values, unobserved heterogeneity, and endogenous bidder entry. We show that important features of the model are nonparametrically identified and apply a semiparametric estimation approach to data from U.S. offshore oil and gas lease auctions. 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. Failing to account for unobserved heterogeneity obscures the empirical evidence of common values. We examine the implications of our estimates for the classic revenue ranking of sealed bid auction designs, and for 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 Castello Branco Sant'Anna, Marcelo, Common Values, Unobserved Heterogeneity, and Endogenous Entry in U.S. Offshore Oil Lease Auctions (June 21, 2019). Cowles Foundation Discussion Paper No. 2137R, June 2019, Available at SSRN: https://ssrn.com/abstract=3409207 or http://dx.doi.org/10.2139/ssrn.3409207

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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Marcelo Castello Branco Sant'Anna

FGV EPGE ( email )

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Rio de Janeiro
Brazil

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