Efficient investment in a dynamic auction environment

We analyze an environment in which bidders’ private values change over time due to both private investments and exogenous shocks. We demonstrate that a highlydecentralized mechanism achieves efficiency. The mechanism requires a stage of costly public announcements (i.e., signaling) to induce efficient investment. For this reason, an equilibrium selection issue arises, but can be handled by a minor modification in the spirit of virtual implementation. ∗An earlier version of this paper circulated under the title “The Variable Value Environment: Auctions and Actions.” The authors are grateful to Rick Ericson, Drew Fudenberg, Giuseppe Lopomo, Eric Maskin, Paul Milgrom, Anna Mikoucheva, Eric Rasmusen, Mike Riordan, Ilya Segal, Thomas Sjostrom, Eric Stout, Jeroen Swinkels, Robert Townsend, and seminar participants at Harvard, MIT, and Columbia. †Duke University, Fuqua School of Business, email: [email protected] ‡Yahoo! Labs, email: [email protected] §New Economic School, email: [email protected]