Working Paper: CEPR ID: DP3670
Authors: Michael Schwarz; Konstantin Sonin
Abstract: This Paper introduces and formally models the variable value environment, where bidders' private values may change over time as a result of both private actions and exogenous shocks. Examples of private actions and exogenous shocks are complementary investments and exogenous changes in bidder's business, respectively. We study mechanisms that lead to efficient allocations, i.e. those in which the final value of the object to the winning bidder net of the total cost of private actions undertaken by all agents is maximized. We characterize the first best allocation, and propose a mechanism that yields the first best allocation in equilibrium. This mechanism has an inefficient pooling equilibrium along with an efficient separating equilibrium. To rule out the pooling equilibrium, we introduce a class of almost efficient mechanisms that force players to coordinate on the separating equilibrium.
Keywords: Auctions; Variable Value Environment
JEL Codes: D44; D80
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| private actions (e.g., complementary investments) (G39) | bidders' private values (D44) |
| exogenous shocks (e.g., changes in demand or regulatory environment) (E32) | private values (D46) |
| information revelation (D82) | auction efficiency (D44) |
| mechanism design (D47) | efficient allocations (D61) |