The relation between variance and information rent in auctions

Brett Katzman, Julian Reif, Jesse A. Schwartz

Research output: Contribution to journalArticlepeer-review

Abstract

This paper examines the conventional wisdom, expressed in McAfee and McMillan's (1987) widely cited survey paper on auctions, that links increased variance of bidder values to increased information rent. We find that although the conventional wisdom does indeed hold in their (1986) model of a linear contract auction, this relationship is an artifact of that particular model and cannot be generalized. Using Samuelson's (1987) model, which is similar but allows for unobservable costs, we show that increased variance does not always imply increased information rent. Finally, we give the appropriate measure of dispersion (different from variance) that provides the link between the bidder value distribution and information rent.

Original languageEnglish (US)
Pages (from-to)127-130
Number of pages4
JournalInternational Journal of Industrial Organization
Volume28
Issue number2
DOIs
StatePublished - Mar 2010
Externally publishedYes

Keywords

  • Contract auctions
  • Dispersion
  • Information rent
  • Variance

ASJC Scopus subject areas

  • Industrial relations
  • Aerospace Engineering
  • Economics and Econometrics
  • Economics, Econometrics and Finance (miscellaneous)
  • Strategy and Management
  • Industrial and Manufacturing Engineering

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