CFDP 2141

Unobserved Heterogeneity in Auctions

Author(s): 

Publication Date: August 2018

Pages: 29

Abstract: A common concern in the empirical study of auctions is the likely presence of auction-specific factors that are common knowledge among bidders but unobserved to the econometrician. Such unobserved heterogeneity confounds attempts to uncover the underlying structure of demand and information, typically a primary feature of interest in an auction market. Unobserved heterogeneity presents a particular challenge in first-price auctions, where identification arguments rely on the econometrician’s ability to reconstruct from observables the conditional probabilities that entered each bidder’s equilibrium optimization problem; when bidders condition on unobservables, it is not obvious that this is possible. Here we discuss several approaches to identification developed in recent work on first-price auctions with unobserved heterogeneity. Despite the special challenges of this setting, all of the approaches build on insights developed in other areas of econometrics, including those on control functions, measurement error, and mixture models. Because each strategy relies on different combinations of model restrictions, technical assumptions, and data requirements, their relative attractiveness will vary with the application. However, this varied menu of results suggests both a type of robustness of identifiability and the potential for expanding the frontier with additional work.

Keywords: Nonparametric identification, Control function, Measurement error, Finite mixture, Quasi-control function