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All-pay auctions with affiliated values

Chi, Chang Koo; Murto, Pauli; Välimäki, Juuso
Working paper
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URI
http://hdl.handle.net/11250/2451926
Date
2017-08
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  • Discussion papers (SAM) [586]
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.
Publisher
Institutt for samfunnsøkonomi, NHH
Series
DP SAM;13/2017

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