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Applications of Auctions and Negotiations

Paper Session

Sunday, Jan. 6, 2019 1:00 PM - 3:00 PM

Atlanta Marriott Marquis, M301
Hosted By: American Economic Association
  • Chair: Thomas Covert, University of Chicago

Bidding and Drilling Under Uncertainty: Identification and Estimation of Contingent Payment Auctions

Vivek Bhattacharya
,
Northwestern University
Andrey Ordin
,
Duke University
James Roberts
,
Duke University

Abstract

An auction winner's payment is often contingent on post-auction outcomes. The design of these contingent payment auctions can influence both bidding and incentives to exert effort after the auction---thus affecting revenue---but this feature is often ignored in the empirical auction literature. This paper studies a particular model of such contingent payment auctions in the context of bidding and drilling in onshore oil auctions in the Permian Basin. This model features a richer set of primitives than standard models of oil auctions, including a distinction between beliefs about quantities and costs and uncertainty over these values at the time of bidding, but we show that these primitives are nonparametrically identified from bid data as well as data on the time to drill in a private value setting. We then parametrically estimate a common values model, using data from onshore oil auctions in New Mexico. Preliminary estimates suggest that optimal choice of royalty in the fixed-royalty auction, the industry standard, can improve expected revenues by about 10\% but will also cause these revenues to be more sensitive to shocks in the price of oil, which may prevent some governments that are especially dependent on oil revenues from wanting to adopt this mechanism. While we use post-auction data to identify the primitives of our model, we conclude by showing that under certain settings, the primitives of contingent payment auctions can be recovered nonparametrically purely from data at the time of bidding---a result that may spur future work on the empirics of contingent payment auctions.

Relinquishing Riches: Auctions Versus "Wild West" Negotiations in Texas Oil and Gas Leasing

Thomas Covert
,
University of Chicago
Richard Sweeney
,
Boston College

Abstract

This paper compares the outcomes from informally negotiated oil and gas leases to those awarded via auction. We use detailed data on all contractual characteristics and production outcomes for the universe of publicly owned mineral rights in Texas between 2005 and 2016. For 35% of these mineral parcels, the Relinquishment Act of 1919 authorizes the private surface owners to negotiate leases on behalf of the public, in exchange for half of the proceeds, while the remainder are allocated in centralized auctions. Using variation from this natural experiment, we find that decades later, parcels allocated via auction garner 32 percent larger up-front payments than negotiated transactions do. We also document that the two mechanisms allocate mineral rights to different firms, and that leases allocated by auction are more productive, although the evidence here is weaker. These results are consistent with a strand of the mechanism design literature predicting superior seller revenues and allocative efficiency for auctions compared with other mechanisms. Our findings also have important implications for the more than $2 trillion of minerals owned by private individuals in the US.

Communication and Bargaining Breakdown: An Empirical Analysis

Matthew Backus
,
Columbia University
Thomas Blake
,
A9
Steven Tadelis
,
University of California-Berkeley

Abstract

Bargaining breakdown---whether as delay, conflict, or missing trade---plagues bargaining in environments with incomplete information. Does communication alleviate these costs? Prior theoretical and experimental evidence is ambivalent. We examine this question using field data from an online bargaining marketplace: eBay Germany's Best Offer platform. On May 23, 2016, the platform introduced unstructured communication allowing buyers and sellers on the desktop version of the site, but not the mobile app, to accompany price offers with a message. Using this natural experiment, our differences-in-differences approach documents a 14% decrease in the the rate of breakdown among compliers.

Up-Cascaded Wisdom of the Crowd

William Cong
,
University of Chicago

Abstract

Economic activities such as crowdfunding often involve sequential interactions, observational learning, and successes contingent on achieving certain thresholds of support. To analyze them, we incorporate an all-or-nothing (AoN) feature in a classical model of information cascade. Relative to standard settings, we find that an AoN target effectively delegates early supporters' downside protection to a later "gate-keeper", and leads to uni-directional cascades and prevents agents' ignoring private signals and imitating preceding agents' rejections. Consequently, information aggregation improves, and issuance becomes less under-priced, even when agents have the options to wait. More generally, endogenous AoN targets improve the financing efficiency of costly projects and the harnessing of the wisdom of the crowd under information cascades, and approaches the first-best as the crowd grows larger.
Discussant(s)
Yunmi Kong
,
Rice University
Piotr Dworczak
,
Northwestern University
Sarah Moshary
,
University of Pennsylvania
Scott Duke Kominers
,
Harvard Business School
JEL Classifications
  • D4 - Market Structure, Pricing, and Design
  • L1 - Market Structure, Firm Strategy, and Market Performance