Working Paper: NBER ID: w28539
Authors: Kei Kawai; Jun Nakabayashi; Juan M. Ortner
Abstract: We study the inner workings of a bidding cartel focusing on the way in which bidders communicate with one another regarding how each bidder should bid. We show that the designated winner of the cartel can attain higher payoffs by randomizing its bid and keeping it secret from other bidders when defection is a concern. Intuitively, randomization makes defection less attractive as potential defectors face the risk of not winning the auction even if they deviate. We illustrate how our theoretical predictions are borne out in practice by studying a bidding cartel that operated in the town of Kumatori, Japan.
Keywords: No keywords provided
JEL Codes: L41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| secrecy of the winning bid (D44) | incentive to defect (C72) |
| randomizing bids (D44) | secrecy of the winning bid (D44) |
| secrecy of the winning bid (D44) | higher payoffs for designated winner (J33) |
| incentive compatibility (IC) constraints (D10) | potential for defection (F55) |
| secrecy of the winning bid (D44) | reduced attractiveness of defection (C72) |
| public knowledge of the bid (D44) | defection (Y60) |