An Equilibrium Model of the First-Price Auction with Strategic Uncertainty: Theory and Empirics

TL;DR

This paper develops a new equilibrium model for first-price auctions accounting for strategic uncertainty, where bidders have limited information about opponents' bids, and demonstrates its effectiveness through empirical application to highway procurement auctions.

Contribution

It introduces a novel model capturing bidders' strategic uncertainty with limited bid information and provides equilibrium characterization and empirical validation.

Findings

Model accurately estimates cost distributions in highway auctions

Bidders' strategies are robust under limited bid information

Good out-of-sample performance in empirical application

Abstract

In many first-price auctions, bidders face considerable strategic uncertainty: They cannot perfectly anticipate the other bidders' bidding behavior. We propose a model in which bidders do not know the entire distribution of opponent bids but only the expected (winning) bid and lower and upper bounds on the opponent bids. We characterize the optimal bidding strategies and prove the existence of equilibrium beliefs. Finally, we apply the model to estimate the cost distribution in highway procurement auctions and find good performance out-of-sample.