The Relation Between Variance and Information Rents in Auctions
Document Type
Article
Publication Date
3-2010
Abstract
This paper examines the conventional wisdom, expressed in McAfee and McMillan's (1987) widely cited survey paper on auctions, that links increased variance of bidder values to increased information rent. We find that although the conventional wisdom does indeed hold in their (1986) model of a linear contract auction, this relationship is an artifact of that particular model and cannot be generalized. Using Samuelson's (1987) model, which is similar but allows for unobservable costs, we show that increased variance does not always imply increased information rent. Finally, we give the appropriate measure of dispersion (different from variance) that provides the link between the bidder value distribution and information rent.
Journal Title
International Journal of Industrial Organization
Journal ISSN
0167-7187
Volume
28
Issue
2
First Page
127
Last Page
130
Digital Object Identifier (DOI)
10.1016/j.ijindorg.2009.07.005