The Relation Between Variance and Information Rent in Auctions

12 Pages Posted: 3 Aug 2015

See all articles by Brett Katzman

Brett Katzman

University of Miami - School of Business Administration - Department of Economics

Julian Reif

University of Illinois at Urbana-Champaign

Jesse Schwartz

Kennesaw State University - Department of Economics, Finance, and Quan

Date Written: March 1, 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.

Keywords: dispersion, information rent, variance, contract auctions

JEL Classification: D44, D82, L14

Suggested Citation

Katzman, Brett Eric and Reif, Julian and Schwartz, Jesse, The Relation Between Variance and Information Rent in Auctions (March 1, 2010). International Journal of Industrial Organization, Vol. 28, No. 2, 2010, Available at SSRN: https://ssrn.com/abstract=2638667

Brett Eric Katzman

University of Miami - School of Business Administration - Department of Economics ( email )

P.O. Box 248126
Coral Gables, FL 33124-6550
United States
305-284-1654 (Phone)

HOME PAGE: http://www.bus.miami.edu/~eco/aaa/faculty/List/katzman.htm

Julian Reif (Contact Author)

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL 61820
United States

HOME PAGE: http://www.julianreif.com

Jesse Schwartz

Kennesaw State University - Department of Economics, Finance, and Quan ( email )

1000 Chastain Road
Kennesaw, GA 30144
United States

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