Distinguishing incentive from selection effects in auction-determined contracts

This paper develops a novel approach to estimate how contract and principal–agent characteristics influence post-auction outcome when the matching between agents principals derives from an auction process. We propose control-function account jointly for endogeneity of contracts matching. consists of, first, estimating primitives interdependent values model – which is shown be non-parametrically identified bidding data second, constructing control functions based on distribution unobserved private signals conditional outcome. A Monte Carlo study shows that our augmented equation corrects biases well, even in small samples. apply methodology labor market application effect sports players’ auction-determined wages their individual performances. also use structural estimates evaluate strength inefficiencies assess counterfactual reservation wage policies.