Journal Article

Identification and Estimation of Auction Models with Unobserved Heterogeneity

Elena Krasnokutskaya

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 78, issue 1, pages 293-327
Published in print January 2011 | ISSN: 0034-6527
Published online January 2011 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1093/restud/rdq004
Identification and Estimation of Auction Models with Unobserved Heterogeneity

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In many procurement auctions, the bidders' unobserved costs depend both on a common shock and on idiosyncratic private information. Assuming a multiplicative structure, I derive sufficient conditions under which the model is identified and propose a non-parametric estimation procedure that results in uniformly consistent estimators of the cost components' distributions. The estimation procedure is applied to data from Michigan highway procurement auctions. Private information is estimated to account for 34% of the variation in bidders' costs. It is shown that accounting for unobserved auction heterogeneity has important implications for the evaluation of the distribution of rents, efficiency, and optimal auction design.

Keywords: First-price auctions; Unobserved auction heterogeneity; Highway procurement; L0; L1; L2; L8; M3

Journal Article.  13717 words.  Illustrated.

Subjects: Services ; Firm Objectives, Organization, and Behaviour ; Industrial Organization ; Marketing ; Market Structure, Firm Strategy, and Market Performance

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