Efficiency in Auctions with Private and Common Values

Auctions generally do not lead to efficient outcomes when the expected value of the object for sale depends on both private and common value information. We report a series of first-price auction experiments to test three key predictions of auctions with private and common values: (i) inefficiencies grow with the uncertainty about the common value while revenues fall, (ii) increased competition results in more efficient outcomes and higher revenues, and (iii) revenues and efficiency are higher when information about the common value is publicly released. We compare the predictions of several bidding models, including Nash, when examining these issues. A model in which a fraction of the bidders falls prey to a winner’s curse and decision-making is noisy, best describes bidding behavior. We find that revenues and efficiency are positively affected by increased competition and a reduction in uncertainty about the common value. The public release of high-quality information about the common value also has positive effects on efficiency, although less so than predicted by Nash equilibrium bidding. JEL Classification: C72, D44.