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Do auctions select efficient firms?


  •  We thank an anonymous referee, Larry Ausubel, Benny Moldovanu, audiences at ESEM 2007, European University Institute, Groningen, Institute of Economic Analysis (Barcelona), Erasmus University Rotterdam, Maastricht, Vienna and Tinbergen Institute, for helpful comments and suggestions. We are especially grateful to David Myatt (editor) for providing very extensive and valuable comments on improving the exposition of the key result of the article.


We consider a government auctioning off multiple licences to firms that compete in an aftermarket. Firms have different costs, and cost-efficiency is private information in the auction and in the aftermarket. If only one licence is auctioned, standard results say that the most efficient firm wins the auction as it has the highest valuation for the licence. We analyse conditions under which this result does and does not generalise to the case of auctioning multiple licences and aftermarket competition. Strategic interaction in the aftermarket is responsible for the fact that auctions may select inefficient firms.

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