The Relation Between Variance and Information Rents in Auctions
Economics, Finance, & Quantitative Analysis
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.
International Journal of Industrial Organization
Digital Object Identifier (DOI)
Katzman, Brett, Julian Reif, and Jesse A. Schwartz. "The Relation between Variance and Information Rent in Auctions." International Journal of Industrial Organization 28.2 (2010): 127-130.