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Identification and Estimation of Auction Model with Two-Dimensional Unobserved Heterogeneity

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  • Elena Krasnokutskaya

    (Department of Economics, University of Pennsylvania)

Abstract

This paper investigates the empirical importance of allowing for multi-dimensional sources of unobserved heterogeneity in auction models with private information. It in turn develops the estimation procedure that recovers the distribution of private information in the presence of two distinct sources of unobserved heterogeneity. It is shown that this estimation procedure identifies components of the model and produces uniformly consistent estimators of these components. The estimation procedure is applied to the data from highway procurement. The results of the estimation indicate that allowing for two-dimensional unobserved heterogeneity may significantly affect the results of estimation as well as policy-relevant instruments derived from the estimated distributions of bidders’ costs.

Suggested Citation

  • Elena Krasnokutskaya, 2010. "Identification and Estimation of Auction Model with Two-Dimensional Unobserved Heterogeneity," PIER Working Paper Archive 10-036, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    • Handle: RePEc:pen:papers:10-036
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    References listed on IDEAS

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    1. Bajari, Patrick & Tadelis, Steven, 2001. "Incentives versus Transaction Costs: A Theory of Procurement Contracts," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 387-407, Autumn.
    2. Mireia Jofre-Bonet & Martin Pesendorfer, 2003. "Estimation of a Dynamic Auction Game," Econometrica, Econometric Society, vol. 71(5), pages 1443-1489, September.
    3. Li, Tong & Perrigne, Isabelle & Vuong, Quang, 2000. "Conditionally independent private information in OCS wildcat auctions," Journal of Econometrics, Elsevier, vol. 98(1), pages 129-161, September.
    4. Han Hong, 2000. "Increasing Competition and the Winner's Curse: Evidence from Procurement," Econometric Society World Congress 2000 Contributed Papers 1628, Econometric Society.
    5. Elena Krasnokutskaya & Katja Seim, 2011. "Bid Preference Programs and Participation in Highway Procurement Auctions," American Economic Review, American Economic Association, vol. 101(6), pages 2653-2686, October.
    6. Yingyao Hu & David McAdams & Matthew Shum, 2009. "Nonparametric Identification of Auction Models with Non-Separable Unobserved Heterogeneity," Economics Working Paper Archive 553, The Johns Hopkins University,Department of Economics.
    7. Emmanuel Guerre & Isabelle Perrigne & Quang Vuong, 2009. "Nonparametric Identification of Risk Aversion in First-Price Auctions Under Exclusion Restrictions," Econometrica, Econometric Society, vol. 77(4), pages 1193-1227, July.
    8. Li, Tong & Vuong, Quang, 1998. "Nonparametric Estimation of the Measurement Error Model Using Multiple Indicators," Journal of Multivariate Analysis, Elsevier, vol. 65(2), pages 139-165, May.
    9. Philip A. Haile & Han Hong & Matthew Shum, 2003. "Nonparametric Tests for Common Values in First-Price Sealed-Bid Auctions," Cowles Foundation Discussion Papers 1445, Cowles Foundation for Research in Economics, Yale University.
    10. Elena Krasnokutskaya, 2011. "Identification and Estimation of Auction Models with Unobserved Heterogeneity," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 78(1), pages 293-327.
    11. Patrick Bajari & Lixin Ye, 2003. "Deciding Between Competition and Collusion," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 971-989, November.
    12. Donald, Stephen G & Paarsch, Harry J, 1993. "Piecewise Pseudo-maximum Likelihood Estimation in Empirical Models of Auctions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(1), pages 121-148, February.
    13. Porter, Robert H & Zona, J Douglas, 1993. "Detection of Bid Rigging in Procurement Auctions," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 518-538, June.
    14. Donald, Stephen G. & Paarsch, Harry J., 1996. "Identification, Estimation, and Testing in Parametric Empirical Models of Auctions within the Independent Private Values Paradigm," Econometric Theory, Cambridge University Press, vol. 12(3), pages 517-567, August.
    15. Han Hong & Matthew Shum, 2002. "Increasing Competition and the Winner's Curse: Evidence from Procurement," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 69(4), pages 871-898.
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    Citations

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    Cited by:

    1. Yusuke Matsuki, 2016. "A Distribution-Free Test of Monotonicity with an Application to Auctions," Working Papers e110, Tokyo Center for Economic Research.
    2. Hu, Yingyao & McAdams, David & Shum, Matthew, 2013. "Identification of first-price auctions with non-separable unobserved heterogeneity," Journal of Econometrics, Elsevier, vol. 174(2), pages 186-193.
    3. Luo, Yao, 2020. "Unobserved heterogeneity in auctions under restricted stochastic dominance," Journal of Econometrics, Elsevier, vol. 216(2), pages 354-374.
    4. Jihui Chen & Maochao Xu, 2015. "Asymmetry and revenue in second-price auctions: a majorization approach," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 39(3), pages 625-640, July.
    5. Grundl, Serafin & Zhu, Yu, 2024. "Two results on auctions with endogenous entry," Economics Letters, Elsevier, vol. 234(C).
    6. Grundl, Serafin & Zhu, Yu, 2019. "Identification and estimation of risk aversion in first-price auctions with unobserved auction heterogeneity," Journal of Econometrics, Elsevier, vol. 210(2), pages 363-378.

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    More about this item

    Keywords

    unobserved auction heterogeneity; procurement auctions; reserve price;
    All these keywords.

    JEL classification:

    • L0 - Industrial Organization - - General
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • L8 - Industrial Organization - - Industry Studies: Services
    • M3 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising

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