Ulric B. and Evelyn L. Bray Social Sciences Seminar
Abstract: We develop an empirical approach to first-price sealed bid auctions with affiliated values, unobserved auction-level heterogeneity, spatial correlation, and endogenous bidder entry. Following Haile, Hong and Shum (2003), we model bidder entry with a reduced form. However, we avoid requiring that entry respond to all variation in the auction-level unobservable, and we show that the model nests a specification in which a standard entry model à la Berry (1992) is followed by a standard symmetric affiliated values auction à la Milgrom and Weber (1982). We show that key features of the model are nonparametrically identified and propose a semi-parametric quasi-maximum likelihood estimation approach. Key elements of the model and approach are motivated by our application to U.S. offshore oil and gas lease auctions. Although these are often cited as the classic example of common value auctions, formal testing for common values has been hindered by the confounding effects of unobserved heterogeneity. We find that unobserved heterogeneity has significant effects on bidding and on the conclusions one reaches. In particular, we reject the the private values hypothesis in favor of common values only when accounting for unobserved heterogeneity. We also find that both unobserved heterogeneity and correlation among bidders' private signals contribute to the observed correlation among bids.