Publication Date: June 2018
Revision Date: June 2019
Abstract: In a "common values" environment, some market participants have private information relevant to others' assessments of their own valuations or costs. Economic theory shows that this type of informational asymmetry can have important implications for market performance and market design. Yet even for the classic example of an oil lease auction, formal evidence on the presence and strength of common values has been limited by the problem of auction-level unobserved heterogeneity that is likely to affect both participation in an auction and bidders' willingness to pay. Here we develop an empirical approach for first-price sealed bid auctions with affiliated values, unobserved heterogeneity, and endogenous bidder entry. We show that important features of the model are nonparametrically identified and apply a semiparametric estimation approach to data from U.S. offshore oil and gas lease auctions. 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. Failing to account for unobserved heterogeneity obscures the empirical evidence of common values. We examine the implications of our estimates for the classic revenue ranking of sealed bid auction designs, and for the interaction between affiliation, the winner's curse, and the number of bidders in determining the aggressiveness of bidding and seller revenue.