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Auctions for Oil and Gas Leases with an Informed Bidder and a Random Reservation Price
Kenneth Hendricks
Robert H. Porter
Charles A. Wilson
Abstract
We analyze a first-price, sealed bid auction with a random reservation price to study the federal sales of offshore oil and gas leases on drainage tracts. Our model assumes the object to be sold has an unknown common value, but one buyer has better information than the others. We permit the reservation price to be correlated with the information of the informed buyer, which reflects both his assessment of the value of the object and the probability of rejection at any bid. Assuming all random variables are affiliated, we establish the following results. (i) The percentage rate of increase in the distribution of the uninformed bid is never greater than the percentage rate of increase of the distribution of the informed bid. (ii) The distributions are identical at bids above the support of the reservation price. (iii) The informed buyer is more likely to submit low bids. We demonstrate that bid data from the federal sales of offshore drainage leases satisfy these restrictions.
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