DP5558 Allocative and Informational Externalities in Auctions and Related Mechanisms

Author(s): Philippe Jehiel, Benny Moldovanu
Publication Date: March 2006
Keyword(s): auctions, externalities, interdependent values
JEL(s): D44, D82
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5558

We study the effects of allocative and informational externalities in (multi-object) auctions and related mechanisms. Such externalities naturally arise in models that embed auctions in larger economic contexts. In particular, they appear when there is downstream interaction among bidders after the auction has closed. The endogeneity of valuations is the main driving force behind many new, specific phenomena with allocative externalities: even in complete information settings, traditional auction formats need not be efficient, and they may give rise to multiple equilibria and strategic non-participation. But, in the absence of informational externalities, welfare maximization can be achieved by Vickrey-Clarke- Groves mechanisms. Welfare-maximizing Bayes-Nash implementation is, however, impossible in multi-object settings with informational externalities, unless the allocation problem is separable across objects (e.g. there are no allocative externalities nor complementarities) or signals are one-dimensional. Moreover, implementation of any choice function via ex-post equilibrium is generically impossible with informational externalities and multidimensional types.