DP11376 Correcting for Sample Selection From Competitive Bidding, with an Application to Estimating the Effect of Wages on Performance

Author(s): Laurent Lamy, Manasa Patnam, Michael Visser
Publication Date: July 2016
Keyword(s): Sample Selection, Structural Econometrics of Auctions, Wage-Performance Elasticity
JEL(s): C13, C57, D44, M52
Programme Areas: Labour Economics, Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11376

This paper proposes a method to estimate the relationship between the price of a good sold at auction, and a post-auction outcome which is observed among auction winners. To account for both the endogeneity of the auction price and sample selection, we develop a control function approach based on the non-parametric identification of an auction model. In our application we estimate a performance equation using unique field data on wages earned by cricket players and their game-specific performances. Our empirical strategy benefits from the fact that wages are determined through randomly ordered sequential English auctions: the order in which players are sold acts as an exogenous shifter of wages. We find that the positive correlation between wages and performance comes (almost) exclusively from the selection and endogeneity effects.