Abstract: We investigate competition in a delegation framework. An uninformed principal is unable to perform a task herself and must choose between one of two experts to do the job. The experts, who are biased and imperfectly informed, propose action choices simultaneously. In equilibrium experts may exaggerate their biases, taking into account the expected information content of the rival’s proposal and the fact that the principal’s optimal choice serves to offset this exaggeration – similar to bidders reacting to the winner’s curse phenomenon in common value auctions. We show that having a second expert can benefit the principal, even if the two experts have the same biases or if the first expert is known to be unbiased. In contrast with other models of expertise, in our setting the principal prefers experts with equal rather than opposite biases. The principal may also benefit from commitment to an “element of surprise,” making an ex post suboptimal choice with positive probability.
Soliciting Information from Biased Experts (with Attila Ambrus)
Optimal Auctions with Ex-post Verification and Limited Punishments (with Sergii Golovko)
Abstract: In this paper, we consider an auction environment in which after the sale, the seller has the opportunity to verify the winner’s ex-post value and impose a limited punishment for ”underbidding.” Investigating how the seller should approach this opportunity, we show that even small penalties allow the seller to significantly increase her revenue. In our environment, the first-price auction with an optimally chosen penalty rule is optimal among all winner-pay auctions. Before the auction begins, the seller recommends a bidding strategy to the bidders. If the auction winner bids at least as much as the seller has suggested, the winner is not punished; if, on the other hand, the winner does not bid as much as has been recommended, he is punished, with the penalty increasing as the buyer deviates more and more from the recommendation. Our results indicate several qualitative differences from standard (without ex-post punishments) auctions. In equilibrium, buyers bid more aggressively; the optimal reserve price is lower; and the revenue-equivalence principle does not hold—we state conditions under which a first-price auction is superior to a second-price auction. Our results also lead us to suggest the following recommendation for policymakers: A government may increase its revenue when auctioning publicly owned assets by providing tax concessions to buyers who submit sufficiently high bids.