Value of Information in Endogenously Asymmetric Dynamic Auction: An Empirical Analysis

53 Pages Posted: 21 Mar 2007 Last revised: 7 Nov 2011

Date Written: December 1, 2006

Abstract

Design of selling strategies for heterogenous divisible goods auctions with endogenous informational asymmetry is an important policy question. This problem can be analyzed empirically using the distributions of ex- ante valuations of bidders, the value of information and the degree of informational asymmetry. In this paper, I estimate these by a three step procedure from a dynamic auction model with endogenous informational asymmetry. The seller sells multiple goods via a sequence of first price auctions. While bidders are ex-ante symmetric, the first period winner has an informational advantage in the second period bidding game and becomes a strong bidder. This endogenous asymmetry leads to excessive entry and overbidding in the first period relative to a one period game. I characterize the equilibrium in terms of the observed bid distribution and entry behavior. I apply a three step estimation procedure to data on OCS oil tract auctions. I find that the federal government is only ecovering 23% of the 'strong' buyers' willingness to pay in the second period. Bidders perceive the value of information to be at most 12% of their first period's informational rent. A new semiparametric structural test cannot reject the hypothesis of the strong bidder's informational superiority in the second period and sets it at 18% relative to the weak bidder. I use the estimates to design alternate mechanisms and empirically show that government's revenue increases when the asymmetry is taken into account in allocating the goods.

Keywords: Dynamic Auction Estimation, Informational Asymmetry, Non-Parametric Identification and Estimation, Value of Information, Test of Asymmetry, Copulas

JEL Classification: C14, C51, D44, D82

Suggested Citation

Gupta, Sudip, Value of Information in Endogenously Asymmetric Dynamic Auction: An Empirical Analysis (December 1, 2006). Available at SSRN: https://ssrn.com/abstract=970841 or http://dx.doi.org/10.2139/ssrn.970841

Sudip Gupta (Contact Author)

Johns Hopkins University ( email )

Baltimore, MD 20036-1984
United States

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