Common values, unobserved heterogeneity, and endogenous entry in U.S. offshore oil lease auctions

Giovanni Compiani, Philip Haile and Marcelo Sant'Anna
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Giovanni Compiani: Institute for Fiscal Studies

No CWP37/18, CeMMAP working papers from Centre for Microdata Methods and Practice, Institute for Fiscal Studies

Abstract: An oil lease auction is the classic example motivating a common values model. However, formal testing for common values has been hindered by unobserved auction-level heterogeneity, which is likely to affect both participation in an auction and bidders' willingness to pay. We develop and apply an empirical approach for fi rst-price sealed bid auctions with affiliated values, unobserved heterogeneity, and endogenous bidder entry. The approach also accommodates spatial dependence and sample selection. Following Haile, Hong and Shum (2003), we specify a reduced form for bidder entry outcomes and rely on an instrument for entry. However, we relax their control function requirements and demonstrate that our specifi cation is generated by a fully speci fied game motivated by our application. We show that important features of the model are nonparametrically identifi ed and propose a semiparametric estimation approach designed to scale well to the moderate sample sizes typically encountered in practice. Our empirical results show that common values, affiliated private information, and unobserved heterogeneity - three distinct phenomena with different implications for policy and empirical work - are all present and important in U.S. offshore oil and gas lease auctions. We find that ignoring unobserved heterogeneity in the empirical model obscures the presence of common values. We also examine the interaction between affiliation, the winner's curse, and the number of bidders in determining the aggressiveness of bidding and seller revenue.

Date: 2018-07-03
New Economics Papers: this item is included in nep-com, nep-des, nep-ene and nep-gth
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Common Values, Unobserved Heterogeneity, and Endogenous Entry in US Offshore Oil Lease Auctions (2020)
Working Paper: Common Values, Unobserved Heterogeneity, and Endogenous Entry in U.S. Offshore Oil Lease Auctions (2019)
Working Paper: Common Values, Unobserved Heterogeneity, and Endogenous Entry in U.S. Offshore Oil Lease Auctions (2018)
Working Paper: Common Values, Unobserved Heterogeneity, and Endogenous Entry in U.S. Offshore Oil Lease Auction (2018)
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