Working Paper: CEPR ID: DP5118
Authors: Jan Boone; Jacob K. Goeree
Abstract: This paper explores the use of auctions for privatizing public assets. In our model, a single ?insider? bidder (e.g. incumbent management of a government-owned firm) possesses information about the asset?s risky value. In addition, bidders are privately informed about their costs of exploiting the asset. Due to the insider?s presence, uninformed bidders face a strong winner?s curse in standard auctions with devastating consequences for revenues. We show that the optimal mechanism discriminates against the informationally advantaged bidder to ensure truthful information revelation. The optimal mechanism can be implemented via a simple two-stage ?qualifying auction.? In the first stage of the qualifying auction, non-binding bids are submitted to determine who enters the second stage, which consists of a standard second-price auction augmented with a reserve price.
Keywords: information advantage; privatization; qualifying auction; winner's curse
JEL Codes: D44; D82; L33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| standard auctions (D44) | poor expected revenue (H27) |
| winner's curse (D44) | poor expected revenue (H27) |
| informational asymmetry (D82) | poor expected revenue (H27) |
| qualifying auction mechanism (D44) | improved revenue outcomes (H27) |
| qualifying auction mechanism (D44) | elimination of adverse effects of winner's curse (D44) |
| qualifying auction (D44) | optimal revenue maximization (D40) |
| qualifying auction (D44) | bidder behavior (D44) |
| qualifying auction (D44) | revenue outcomes (H27) |
| qualifying auction (D44) | outperformance of second-price and English auctions (D44) |