Optimal Privatization Using Qualifying Auctions

This paper explores the use of auctions for privatizing public assets.In our model, a single "insider" bidder (e.g. incumbent management of a government-owned firm) possesses information about the asset's risky value.In addition, bidders are privately informed about their costs of exploiting the asset.Due to the insider's presence, uninformed bidders face a strong winner's curse in standard auctions with devastating consequences for revenues.We show that the optimal mechanism discriminates against the informationally advantaged bidder to ensure truthful information revelation.The optimal mechanism can be implemented via a simple two-stage "qualifying auction."In the first stage of the qualifying auction, non-binding bids are submitted to determine who enters the second stage, which consists of a standard second-price auction augmented with a reserve price.privatization;qualifying auction;winner’s curse;information advantage

Optimal Market Design

This paper introduces three methodological advances to study the optimal design of static and dynamic markets. First, we apply a mechanism design approach to characterize all incentive-compatible market equilibria. Second, we conduct a normative analysis, i.e. we evaluate alternative competition and innovation policies from a welfare perspective. Third, we introduce a reliable way to measure competition in dynamic markets with nonlinear pricing. We illustrate the usefulness of our approach in several ways. We reproduce the empirical finding that innovation levels are higher in markets with lower price-cost margins, yet such markets are not necessarily more competitive. Indeed, we prove the Schumpeterian conjecture that more dynamic markets characterized by higher levels of innovation should be less competitive. Furthermore, we demonstrate how our approach can be used to determine the optimal combination of market regulation and innovation policies such as R&D subsidies or a weakening of the patent system. Finally, we show that optimal markets are characterized by strictly positive price-cost margins.competition policy;dynamic markets;competition measures;Schumpeter;mechanism design

Optimal Privatization Using Qualifying Auctions

This paper explores the use of auctions for privatizing public assets.In our model, a single "insider" bidder (e.g. incumbent management of a government-owned firm) possesses information about the asset's risky value.In addition, bidders are privately informed about their costs of exploiting the asset.Due to the insider's presence, uninformed bidders face a strong winner's curse in standard auctions with devastating consequences for revenues.We show that the optimal mechanism discriminates against the informationally advantaged bidder to ensure truthful information revelation.The optimal mechanism can be implemented via a simple two-stage "qualifying auction."In the first stage of the qualifying auction, non-binding bids are submitted to determine who enters the second stage, which consists of a standard second-price auction augmented with a reserve price

In search of stars: network formation among heterogeneous agents

This paper reports results from a laboratory experiment on network formation among heterogeneous agents. The experimental design extends the Bala-Goyal [Bala, V., Goyal, S., 2000. A non-cooperative model of network formation, Econometrica 68, 1131-1230] model of network formation with decay and two-way flow of benefits by introducing agents with lower linking costs or higher benefits to others. Furthermore, agents' types may be common knowledge or private information. In all treatments, the (efficient) equilibrium network has a "star" structure. While equilibrium predictions fail completely with homogeneous agents, star networks frequently occur with heterogeneous agents. Stars are not born but rather develop: with a high-value agent, the network's centrality, stability, and efficiency all increase over time. A structural econometric model based on best response dynamics and other-regarding preferences is used to analyze individual linking behavior. Maximum-likelihood estimates of the underlying structural parameters, obtained by pooling data from several treatments, allow us to explain the main treatment effects. © 2008 Elsevier Inc. All rights reserved