2010): “Identification and Testing in Ascending Auctions with Unobserved Heterogeneity

This paper empirically studies the consequences of unobserved heterogeneity on auction design. Unobserved heterogeneity in the objects for sale induces correlation among bidders’ valuations, which violates the standard modeling assumption of independence. We show that standard data from ascending auctions partially identifies a model of correlated private values, in a way that is useful for mechanism design purposes. In particular, if larger auctions are ones where bidders on average have higher valuations (a condition which follows naturally from models of endogenous entry), we get an upper bound on the seller’s expected profit at a given reserve price. If bidders ’ valuations are independent of auction size, a stronger assumption, then we also get a lower bound. We then show that the stronger identifying assumption of independence implies nonparametrically testable restrictions, and we develop a precise asymptotic test of these restrictions. We apply both our identification and testing results to data from the United States Forest Service. We fail to reject independence between valuations and auction size in the data. Furthermore, we find that unobserved heterogeneity has significant implications for USFS reserve price policy, suggesting substantially lower reserve prices than standard analysis and rationalizing changes made to the selling mechanism in th