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Private and common value auctions with ambiguity over correlation

Laohakunakorn, Krittanai, Levy, Gilat and Razin, Ronny (2019) Private and common value auctions with ambiguity over correlation. Journal of Economic Theory, 184. ISSN 0022-0531

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Identification Number: 10.1016/j.jet.2019.08.002

Abstract

We analyze auctions when individuals have ambiguity over the joint information structures generating the valuations and signals of players. We analyze how two standard auction effects interact with the ambiguity of bidders over correlation structures. First, a “competition effect” arises when different beliefs about the correlation between bidders' valuations imply different likelihoods of facing competitive bids. Second, a “winner's value effect” arises when different beliefs imply different inferences about the winner's value. In the private values case, only the first effect exists and this implies that the distribution of bids first order stochastically dominates the distribution of bids in the absence of ambiguity. In common value auctions both effects exist and we show that compared to the canonical model, both in the first-price and second-price auctions, these effects combine to imply that the seller's revenue decreases with ambiguity (in contrast with the private values case). We then characterise the optimal auction in both the private and common value cases. A novel feature that arises in the optimal mechanism in the common values case is that the seller only partially insures the high type against ambiguity.

Item Type: Article
Additional Information: © 2019 Elsevier Inc.
Divisions: Economics
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management
JEL classification: D - Microeconomics > D4 - Market Structure and Pricing > D44 - Auctions
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty
Date Deposited: 20 Aug 2019 10:39
Last Modified: 28 May 2020 23:12
URI: http://eprints.lse.ac.uk/id/eprint/101410

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