Working Papers Series

Papers below are in pdf.

Ron Harstad

WP 11-21
Behavioral Efficiency II: A Simple Laboratory Demonstration
Ronald M. Harstad

Laboratory experiments reporting on shortfalls from allocative efficiency of allocation mechanisms depend on the induced-values methodology, which cannot be extended to the field. Harstad [2011] proposes to observe efficiency of allocation mechanisms without knowing motivations via behavior in appropriately designed aftermarkets. This paper demonstrates the approach in a highly simplified economy: allocation of a single unit of an abstract commodity. In the context studied, second-price auctions are observed to yield significantly greater behavioral inefficiencies than first-price auctions, both in terms of frequency of behaviorally inefficient outcomes, and in terms of the expected size of gains from aftermarket trade missed by the auction itself. The design is shown to be field-ready.

JEL Codes: C9, C93, D01, D61, D03, D46
Keywords: behavioral efficiency, field experiment methodology, allocative efficiency, efficiency of auctions, aftermarkets

WP 11-20
Behavioral Efficiency I: Definition, Methodology and Demonstration
Ronald M. Harstad

Economic experiments conducted in laboratories employing an induced-values methodology can report on allocative efficiencies observed. This methodology is limited by requiring the experimenter to know subjects' motivations, an impossibility in field experiments. Allocative efficiency implies a hypothetical costless aftermarket would be inactive. An outcome of an allocation mechanism is herein defined to be behaviorally efficient if an appropriate aftermarket is actually appended to the allocation mechanism and at most a negligible aggregate size of mutually beneficial gains is observed on the aftermarket. Methodological requirements for observation of behavioral efficiency or inefficiency are put forward. A simple field demonstration indicates when an increase in public good output can cover marginal cost in a mutually beneficial decentralization, without knowing valuations. Several empirical issues that arise with the methodology are noted.

JEL Codes: C9, C93, D01, D61, D03, D46
Keywords: behavioral efficiency, field experiment methodology, allocative efficiency, revelation of valuations, aftermarkets

WP 09-09
Auctioning the Right to Choose When Competition Persists
Ronald M. Harstad

Several papers compare auctioning heterogeneous assets sequentially with sequentially selling the right to choose among assets not yet taken. Typically motivated by auctions of condos for owner occupation, these papers have assumed that each winning bidder exits, so each successive auction has less competition. In many heterogeneous-asset-sale situations, a winning bidder may still be interested in acquiring further assets. We build a simple model of persistent competition, in which the distribution of equilibrium revenue from separate sales is shown to be a mean-preserving spread of the distribution of revenue from selling rights to choose. Persistent competition reveals that a high bidder does not always select his most preferred asset, and that one asset being slightly more likely to be a favored asset discontinuously affects equilibrium bidding.

JEL Codes: D44, D82
Keywords: auction theory; rights-to-choose auctions; revenue comparisons; persistent competition; private information

WP 09-08
Information Variability Impacts in Auctions
Justin Jia, Ronald M. Harstad & Michael H. Rothkopf

A wide variety of auction models exhibit close relationships between the winner's expected profit and the expected difference between the highest and second-highest order statistics of bidders' information, and between expected revenue and the second-highest order statistic of bidders' expected asset values. We use stochastic orderings to see when greater environmental variability of bidders' information enhances expected profit and expected revenue.

JEL Codes: D44, D82, L14, C62
Keywords: winner's curse; adverse selection; common-value auctions; procurement; product quality

WP 09-07
Winner's Curse Corrections Magnify Adverse Selection
Ronald M. Harstad

The adverse-selection literature has only considered the case in which competing sellers' costs of supply are independent and privately known by the individual sellers. In contrast, the auction literature has ignored adverse selection by implicitly assuming that a bid-taker is indifferent between suppliers at a given price. We show that competition in auctions with common-value elements serves to magnify the impact of adverse selection, as a bidder supplying a higher-cost product rationally makes a heightened winner's curse correction in a procurement auction. Hence lower-cost suppliers are disproportionately likely to win the auction, potentially creating a more serious quality problem for the procurer than mainstream adverse-selection models suggest

JEL Codes: D44, D82, L14, C62
Keywords: winner's curse; adverse selection; common-value auctions; procurement; product quality

WP 07-11
Does a Seller Really Want Another Bidder?
Ronald M. Harstad

Jeremy I. Bulow and Paul D. Klemperer (AER, 1996) argue that the usual concerns of auction design miss the big picture, and show that a simple English auction without a reserve price and N + 1 bidders attains expected revenue in excess of any auction with N bidders. The issue of how this additional bidder might be attracted is not treated in their model. In fact, that an auction can convince another bidder it is worth his while to compete carries a critical message about expected revenue. In those many markets where potential bidders decide whether to compete in an auction based on the expected probability of bidding, Bulow and Klemperer's conclusion is shown here to be overturned. I explore the symmetric equilibrium of a model where potential bidders first decide whether to participate in an auction, and then participants select bidding strategies. Expected revenue is increased by some degree of bidder discouragement, in that it is never optimal to have all N potential bidders participate with probability one, even for very small N.

JEL Codes: D44; D82; C72
Keywords: affiliated-values auctions, auction revenue, number of bidders, increased competition, endegenous bidder participation

WP 06-05
Information Aggregation in Auctions with an Unknown Number of Bidders
Ronald M. Harstad, Aleksandar Pekeč and Ilia Tsetlin

Information aggregation, a key concern for uniform-price, common-value auctions with many bidders, has been characterized in models where bidders know exactly how many rivals they face. A model allowing for uncertainty over the number of bidders is essential for capturing a critical condition for information to aggregate: as the numbers of winning and losing bidders grow large, information aggregates if and only if uncertainty about the fraction of winning bidders vanishes. It is possible for the seller to impart this information by precommitting to a specified fraction of winning bidders, via a proportional selling policy. Intuitively, this makes the proportion of winners known, and thus provides all the information that bidders need to make winner’s curse corrections.

JEL Codes: D44, D82, D41
Keywords: information aggregation, common-value auctions, uncertain level of competition

WP 05-19
William S. Vickrey
Ron Harstad

Entry for William Vickrey, prepared for the Dictionary of Scientific Biography

JEL Codes: B31, D82
Keywords: Vickrey's Contributions, Vickrey Auction, Public Economics, Asymmetric Information

WP 05-18
Rational Participation Revolutionizes Auction Theory
Ron Harstad

Potential bidders respond to a seller's choice of auction mechanism for a common-value or affiliated-values asset by endogenous decisions whether to incur a participation cost (and observe a private signal), or forego competing. Privately informed participants decide whether to incur a bid-preparation cost and pay an entry fee, or cease competing. Auction rules and information flows are quite general; participation decisions may be simultaneous or sequential. The resulting revenue identity for any auction mechanism implies that optimal auctions are allocatively efficient; a nontrivial reserve price is revenue-inferior for any common-value auction. Optimal auctions are otherwise contentless: any auction that sells without reserve becomes optimal by adjusting any one of the continuous, spanning parameters, e.g., the entry fee. Seller's surplus-extracting tools are now substitutes, not complements. Many econometric studies of auction markets are seen to be flawed in their identification of the number of bidders.

JEL Codes: D44; D82; C72
Keywords: Optimal Auctions, Endegenous Bidder Participation, Affiliated-Values, Common-Value Auctions, Surplus-Extracting Devices

WP 05-15
Ex-Post Full Surplus Extraction, Straightforwardly
Ron Harstad and Vlad Mares

Consider an estimate of the common value of an auctioned asset that is symmetric in the bidders' types. Such an estimate can be represented solely in terms of the order statistics of those types. This representation forms the basis for a pricing rule yielding truthful bidding as an equilibrium, whether bidders' types are affiliated or independent. We highlight the link between the estimator and full surplus extraction, providing a necessary and sufficient condition for ex-post full surplus extraction, including the possibility of independent types. The results offer sharp insights into the strengths and limits of simple auctions by identifying the source of informational rents in such environments.

JEL Codes: D44, C72, D61
Keywords: Auctions, Full Surplus Extraction, Order Statistic Estimates
Forthcoming in Economic Theory

WP 05-04
Rational Participation Revolutionizes Auction Theory
Ronald M. Harstad

Potential bidders respond to a seller's choice of auction mechanism for a common-value or affiliated-values asset by endogenous decisions whether to incur a participation cost (and observe a private signal), or forego competing. Privately informed participants decide whether to incur a bid-preparation cost and pay an entry fee, or cease competing. Auction rules and information flows are quite general; participation decisions may be simultaneous or sequential. The resulting revenue identity for any auction mechanism implies that optimal auctions are allocatively efficient; a nontrivial reserve price is revenue-inferior for any common-value auction. Characterization of optimal auctions is otherwise contentless, in that any auction that sells without reserve is within the setting of one continuous parameter of an optimal auction; seller's surplus-extracting tools are now substitutes, not complements. Revenue comparisons from the exogenous-bidders literature are upheld in a half-space of parameters, overturned in a half-space. Many econometric studies of auction markets are seen to be flawed in their identifcation of the number of bidders.

JEL Codes: D44; D82; C72
Keywords: optimal auctions, endegenous bidder participation, affiliated-values, common-value auctions, surplus-extracting devices