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Two-Bidder All-Pay Auctions with Interdependent Valuations, Including the Highly Competitive Case

Journal Article
Lucas Rentschler and Theodore L. Turocy
Journal of Economic Theory, 2016

We analyze symmetric, two-bidder all-pay auctions with interdependent valuations and discrete type spaces. Relaxing previous restrictions on the distribution of types and the valuation structure, we present a construction that characterizes all symmetric equilibria. We show how the search problem this construction faces can be complex. In equilibrium, randomization can take place over disjoint intervals of bids, equilibrium supports can have a rich structure, and non-monotonicity of the equilibrium may result in a positive probability of allocative inefficiency when the value of the prize is not common. Particular attention is paid to the case in which an increase in a bidder’s posterior expected value of winning the auction is likely to be accompanied by a corresponding increase for the other bidder. Such environments are “highly competitive” in the sense that the bidder’s higher valuation also signals that the other bidder has an incentive to bid aggressively.

Fraying of the Ties that Bind: Community-Level Financial Institutions and HIV/AIDS with Evidence from KwaZulu Natal, South Africa

Journal Article
Benjamin Linkow and Lucas Rentschler
Journal of African Economies, 2016

This paper provides a theoretical and empirical investigation of the effect of the HIV/AIDS pandemic on community-level informal financial institutions such as rotating savings and credit associations. Our theoretical model illustrates that the mortality risk implied by such a mortality shock limits the scope of informal contracts, leading to more exclusive institutions. Using panel data from the high-prevalence area of KwaZulu Natal, South Africa, we find that mortality at the community level substantially reduces the propensity to participate in informal financial institutions in ways that are consistent with the predictions of our theoretical model.

Risk Preferences and Prenatal Exposure to Sex Hormones for Ladinos

Journal Article
Diego Aycinena, Rimvydas Baltaduonis and Lucas Rentschler
PLoS One, 2014

Risk preferences drive much of human decision making including investment, career and health choices and many more. Thus, understanding the determinants of risk preferences refines our understanding of choice in a broad array of environments. We assess the relationship between risk preferences, prenatal exposure to sex hormones and gender for a sample of Ladinos, which is an ethnic group comprising 62.86% of the population of Guatemala. Prenatal exposure to sex hormones has organizational effects on brain development, and has been shown to partially explain risk preferences for Caucasians. We measure prenatal exposure to sex hormones using the ratio of the length of the index finger to the length of the ring finger (2D:4D), which is negatively (positively) correlated with prenatal exposure to testosterone (estrogen). We find that Ladino males are less risk averse than Ladino females, and that Ladino males have lower 2D:4D ratios than Ladino females on both hands. We find that the 2D:4D ratio does not explain risk preferences for Ladinos. This is true for both genders, and both hands. Our results highlight the importance of exploring the behavioral significance of 2D:4D in non-Caucasian racial groups.

Common-Value Procurement Auctions with Renegotiation

Journal Article
Rimvydas Baltaduonis and Lucas Rentschler
Theoretical Economics Letters, 2014

This note contains the equilibrium bid functions for two types of common-value procurement auctions: 1) a procurement auction in which bids represent an enforceable contract; 2) a procurement auction in which, upon learning the true cost of supplying the good, the winning bidder can renegotiate the contract with the buyer, and each bidder must submit a bond with their bid, which is returned at the end of the auction unless they are the low bidder and renegotiate the contract.

Valuation Structure in First-Price and Least-Revenue Auctions: An Experimental Investigation

Journal Article
Diego Aycinena, Rimvydas Baltaduonis and Lucas Rentschler
Experimental Economics, 2013

In many auctions the valuation structure involves both private and common value elements. Existing experimental evidence (e.g., Goeree and Offerman, 2002) demonstrates that first-price auctions with this valuation structure tend to be inefficient, and inexperienced subjects tend to bid above the break even bidding threshold. In this paper, we compare first-price auctions with an alternative auction mechanism: the least-revenue auction. This auction mechanism shifts the risk regarding the common value of the good to the auctioneer. Such a shift is desirable when ex post negative payoffs for the winning bidder results in unfulfilled contracts, as is often the case in infrastructure concessions contracts. We directly compare these two auction formats within two valuation structures: (1) pure common value and (2) common value with a private cost. We find that, relative to first-price auctions, bidding above the break-even bidding threshold is significantly less prevalent in least-revenue auctions regardless of valuation structure. As a result, revenue in first-price auctions is higher than in least-revenue auctions, contrary to theory. Further, when there are private and common value components, least-revenue auctions are significantly more efficient than first-price auctions.

The Pursuit of Justice: Law and Economics of Legal Institutions

Book Review
Lucas Rentschler
Laissez-Faire, 2012

Economics has a rich history of imperialism, in which the methodology of economics is applied to topics outside its traditional domain. The success of this phenomenon owes much to the insights said methodology provides. One of the most successful examples of such imperialism is public choice, which notes that political actors are likely to maximize their own self-interest, rather than societal well-being. That is, political actors are unlikely to act as “benevolent dictators,” and government failures are likely to emerge if this is not accounted for. The insights yielded by this research program have been, and continue to be, considerable. Given this remarkable success, it is natural to apply these same analytical tools to the legal system. This volume seeks to do just that. It explores environments which relax the assumption that legal actors necessarily act in the public interest, and examines the consequences of self-interested judges, district attorneys, and so on. This book unambiguously increases our understanding of the inner workings of the legal system, while simultaneously highlighting the need for a great deal of additional research. I am pleased to highly recommend this volume to those with an interest in how legal institutions behave in practice. My only quibble is that some of the content, while interesting, seems out of place.

Lex Oppia: An Ancient Example of the Persistence of Emergency Powers

Journal Article
Lucas Rentschler and Christopher Dawe
Laissez-Faire, 2011

Formal institutions within a country represent an incomplete contract with the population. When events occur that the law does not address, and the necessity for action precludes relying on existing mechanisms to address the situation, one approach is to grant emergency and temporary power to the state.  As noted in Akerman (2004), “[u]nless careful precautions are taken, emergency measures have a habit of continuing well beyond their time of necessity.” This paper describes an example from antiquity in which the Roman Senate kept a sumptuary law, Lex Oppia, well past its original purpose. In particular, this law was imposed to assist in the war effort against Carthage, and was kept on the books well after this war ended in the name of preserving the virtue of Roman women.

Risk, Discounting and Demand for Intra-Household Control for Recipients of Conditional Cash Transfers

Working Paper
Diego Aycinena, Szabolcs Blazsek, Lucas Rentschler and Betzy Sandoval
Working Paper

Risk and time preferences are important determinants of investment decisions, particularly for investments in human capital. Yet, very little is known about these preferences for recipients of conditional cash transfers. We simultaneously estimate utility curvature (risk aversion), discounting and present biasedness for such recipients. In addition, we introduce a financially motivated method of measuring willingness to forgo funds to control household finances for a sample of participants in a conditional cash transfer program in Guatemala. We find that participants have a very high degree of risk aversion and low discount factors, which may lead to low levels of investment by participants in the human capital of the household. We also find that intra-household conflict is not significantly related to risk aversion or discounting, but that women who face such conflict are future biased in that they prefer to delay receipt of experimental earnings to the future. This can be interpreted as a conflict avoidance strategy.

Informed Entry in Auctions

Working Paper
Diego Aycinena, Hernan Bejarano and Lucas Rentschler
Working Paper

We examine entry decisions in first-price and English clock auctions with participation costs. Potential bidders observe their value and report maximum willingness to pay (WTP) to participate. Entry occurs if revealed WTP (weakly) exceeds the randomly drawn participation cost. We find no difference in WTP between auction formats, although males have a higher WTP for first-price auctions. WTP is decreasing in the number of potential bidders, but this reduction is less than predicted and small in magnitude.

Auctions with Endogenous Participation and an Uncertain Number of Bidders: Experimental Evidence

Working Paper
Diego Aycinena and Lucas Rentschler
Working Paper

Attracting bidders to an auction is a key factor in determining revenue. We experimentally investigate entry and bidding behavior in first-price and English clock auctions to determine the revenue implications of entry. Potential bidders observe their value and then decide whether or not to incur a cost to enter. We also vary whether or not bidders are informed regarding the number of entrants prior to placing their bids. Revenue equivalence is predicted in all four environments. We find that, regardless of whether or not bidders are informed, first-price auctions generate more revenue than English clock auctions. Within a given auction format, the effect of informing bidders differs. In first-price auctions, revenue is higher when bidders are informed, while the opposite is true in English clock auctions. The optimal choice for an auction designer who wishes to maximize revenue is a first-price auction with uninformed bidders.

Asymmetric Information in Contests: Theory and Experiments

Working Paper
Brit Grosskopf, Lucas Rentschler and Rajiv Sarin
Working Paper

This paper considers imperfectly discriminating contests and all-pay auctions with asymmetric information. In our design one bidder observes an informative signal as to the realized common value of the good. The other bidder holds only public information; she knows the distribution from which the value of the prize is drawn. We characterize the equilibrium in a common-value all-pay auction with this type of information asymmetry. Theory suggests that such asymmetric information yields information rents for the informed bidder and reduces the expected revenue of the seller. We report the results of experimental tests of these theoretical predictions.

An Experiment on Asymmetric Information in First-Price Common-Value Auctions: The Blessed Winner

Working Paper
Brit Grosskopf, Lucas Rentschler and Rajiv Sarin
Working Paper

In common-value auctions bidders have access to public information, and may also hold private information prior to choosing their bids. The literature has predominately focused on the case in which bidders are symmetrically and privately informed, and finds that aggressive bidding such that payoff s are negative is common (the winners curse). In practice, bidders often only have access to public information, and use this information to form (possibly differing) beliefs. In addition a bidder who is not privately informed may face bidders who are. We examine bidding behavior of both informed and uninformed bidders, and vary the information structure they face. We find that uninformed bidders underbid dramatically and persistently, while informed bidders tend to overbid. Our results highlight the importance of correctly modeling the information available to bidders.

Incumbency in Imperfectly Discriminating Contests

Working Paper
Lucas Rentschler
Working Paper

This paper considers a model in which contestants compete in two sequential imperfectly discriminating contests where the prize in each contest has a common but uncertain value, and the value of the prize in the first contest
is positively related to that in the second. The contestant who obtains the prize in the …first contest (the incumbent) privately observes its value, thereby introducing asymmetric information. Relative to the case where the incumbent’s private information does not provide a useful estimate of the value of the prize in the second contest, effort expenditures in the second contest strictly decrease. Further, the incumbent is strictly better off, while the other contestants (the challengers) are strictly worse off. Counterintuitively, the incumbent’s ex ante probability of winning is strictly less than that of a challenger, despite expending (weakly) more effort than a challenger in expectation. Effort expenditures in the …first contest increase such that total effort expenditures over the two contests increase, relative to the case of independent prizes. In the second (terminal) contest, expected effort expenditure of an individual contestant is decreasing in the number of contestants, the expected utility of a contestant is decreasing in the number of contestants, and the aggregate expected effort expenditure is increasing in the number of contestants. Alternative methods of modeling an incumbency advantage are also considered.