Scandinavian Working Papers in Economics

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

No 16/2017: War of attrition 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 University School of Business, Finland
Juuso Välimäki: Aalto University School of Business, Postal: Aalto University School of Business, Finland

Abstract: We study the war of attrition between two players when the players’ signals are binary and affiliated. Our model covers both the case of common values and affiliated private values. We characterize the unique symmetric equilibrium and demonstrate the possibility of nonmonotonic symmetric equilibria, i.e. equilibria where the player with a lower signal wins With positive probability. Such an outcome is inefficient in the case of private valuations. We compare the war of attrition to other related mechanisms, the all-pay auction and standard firstand second-price auctions. The war of attrition dissipates the bidders’ rents more effectively but at the same time distorts the allocation more severely than the other mechanisms. In terms of expected revenues, the war of attrition dominates the standard auctions, but the ranking against the all-pay auction is ambiguous.

Keywords: War of Attrition; affiliated signals

JEL-codes: D44; D82

24 pages, September 14, 2017

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