Who Pays When Auction Rules are Bent?

Abstract:

In many negotiations, rules are soft in the sense that the seller and/or buyers may break them at some cost. When buyers have private values, we show that the cost of such opportunistic behavior (whether by the buyers or the seller) is borne entirely by the seller in equilibrium, in the form of lower revenues. Consequently, the seller is willing to pay an auctioneer to credibly commit to a mechanism in which no one has the ability or the incentive to break the rules. Examples of “costly rule bending” considered here include hiring shill bidders and trying to learn others’ bids before making one’s own.