Interdependent Value Auctions with Insider Bidders∗

I study auctions in which there exists an asymmetry in bidders’ knowledge about their interdependent valuations. Bidders consist of two groups: the insiders, who are perfectly informed of their valuations, and the outsiders, who only observe onedimensional signals, thus being partially informed of their valuations. When only one insider and one outsider exist, both English and second-price auctions allocate the good efficiently while a first-price auction fails to do so. When there are more than two bidders with at least one insider and one outsider, a second-price auction is no longer efficient. By contrast, under plausible conditions on bidders’ valuations, an English auction implements the efficient allocation. I also study the revenue implication of the knowledge asymmetry, showing that the revenue generated from an English auction increases when an outsider is replaced by an insider with the same valuation (i.e., as more bidders become informed of their valuations). My results apply to a class of auctions in which bidders’ valuations consist of common and private value components, with some bidders informed of the common component and others uninformed of it. ∗I am grateful to Yeon-Koo Che, my advisor, for his continuing support and helpful comments and thank Phil Haile and Larry Samuelson for their helpful comments. My thanks also go to Phil Reny and Bill Sandholm for their kind suggestions. All remaining errors are mine. †Department of Economics, University of Wisconsin, Madison, WI 53706. Email: [email protected]