Scandinavian Working Papers in Economics

Discussion Paper Series in Economics,
Norwegian School of Economics, Department of Economics

No 13/2017: All-pay auctions with affiliated values.

Chang Koo Chi (), Pauli Murto () and Juuso Välimäki ()
Additional contact information
Chang Koo Chi: Dept. of Economics, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Economics, Helleveien 30, N-5045 Bergen, Norway
Pauli Murto: Aalto University School of Business, Postal: Aalto, Finland
Juuso Välimäki: Aalto University School of Business, Postal: Aalto, Finland

Abstract: This paper analyzes all-pay auctions where the bidders have affiliated values for the object for sale and where the signals take binary values. Since signals are correlated, high signals indicate a high degree of competition in the auction and since even losing bidders must pay their bid, non-monotonic equilibria arise. We show that the game has a unique symmetric equilibrium, and that whenever the equilibrium is non-monotonic the contestants earn no rents. All-pay auctions result in low expected rents to the bidders, but also induce inefficient allocations in models with affiliated private values. With two bidders, the effect on rent extraction dominates, and all-pay auction outperforms standard auctions in terms of expected revenue. With many bidders, this revenue ranking is reversed for some parameter values and the inefficient allocations persist even in large auctions.

Keywords: All-pay auctions; common values; affiliated signals

JEL-codes: D44; D82

45 pages, June 17, 2017

Note: This is DP No 13/2017

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