Bidding Rings and the Winner's Curse: The Case of Federal Offshore Oil and Gas Lease Auctions

52 Pages Posted: 3 Dec 2003

See all articles by Kenneth Hendricks

Kenneth Hendricks

University of Texas at Austin - Department of Economics

Robert H. Porter

Northwestern University - Department of Economics; National Bureau of Economic Research (NBER)

Guofu Tan

University of Southern California - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: June 2003

Abstract

This paper extends the theory of legal cartels to affiliated private value and common value environments, and applies the theory to explain joint bidding patterns in U.S. federal government offshore oil and gas lease auctions. We show that efficient collusion is always possible in private value environments, but may not be in common value environments. In the latter case, fear of the winner's curse can cause bidders not to bid, which leads to inefficient trade. Buyers with high signals may be better off if no one colludes. The bid data is consistent with oil and gas leases being common value assets, and with the prediction that the winner's curse can prevent rings from forming on marginal tracts.

Suggested Citation

Hendricks, Kenneth and Porter, Robert H. and Tan, Guofu, Bidding Rings and the Winner's Curse: The Case of Federal Offshore Oil and Gas Lease Auctions (June 2003). Available at SSRN: https://ssrn.com/abstract=475584 or http://dx.doi.org/10.2139/ssrn.475584

Kenneth Hendricks

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States
512-475-8532 (Phone)
512-471-3510 (Fax)

Robert H. Porter

Northwestern University - Department of Economics ( email )

2003 Sheridan Road
Evanston, IL 60208
United States
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National Bureau of Economic Research (NBER)

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Guofu Tan (Contact Author)

University of Southern California - Department of Economics ( email )

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Los Angeles, CA 90089
United States
213-740-3520 (Phone)

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