On the Core of Auctions with Externalities: Stability and Fairness
21 Pages Posted: 14 Mar 2020 Last revised: 16 Apr 2020
Date Written: February 1, 2020
In auctions with externalities, it is well-known that the core can be empty, which is undesirable both in terms of stability and fairness. Nevertheless, some auction outcome must be chosen. We separate deviations into two types: deviations by paying more and deviations by refusing to pay. In high-stakes auctions where bidders also care about their reputation, the latter are unlikely to occur, or else can be prevented by legal interventions. In contrast, the former is more undesirable in the sense that the seller and the bidders experience justified envy. We show that the core is nonempty if bidders cannot refuse to pay.
Keywords: core, auction, externalities, justified envy, core-selecting mechanism
JEL Classification: C71, D44, D62
Suggested Citation: Suggested Citation