Auctions with Resale when Private Values are Uncertain: Theory and Empirical Evidence*

Auction theory has represented one of the richest areas of research in the past three decades. This study extends this line of work by examining theoretically the effect of allowing resale opportunities when private values are uncertain and all bidders are not risk neutral. We put our theory, and previous theory, to the test by combining field and laboratory data. Our field data are drawn from nearly 3,000 auctions (over 10,000 individual bids) for cutting rights of standing timber in British Columbia. In comparing bidding patterns across agents who are likely to have resale opportunities (mills) with those who likely do not (loggers), we find evidence that is consistent with theoretical predictions. Critical evaluation of the reduced-form bidding model, however, reveals that sharp tests of the theoretical predictions are not possible because several other differences may exist across these bidder types. We, therefore, use a laboratory experiment to examine if the resale opportunity by itself can have the predicted effect. We find that it does have the predicted effect, but a theoretical model based on risk averse bidders explains the data patterns much more accurately than one based on risk neutral bidders. More generally, the paper highlights the inferential power of combining naturally occurring data with laboratory data.