Auctions with Resale Markets: An Application to U.S. Forest Service Timber Sales

Abstract

When bidders anticipate an opportunity for resale trade, the value of winning an auction is determined in part by the option values of buying and selling in the secondary market. One implication is that a bidder's willingness to pay at an auction increases with the expected level of competition between resale buyers. Empirical evidence from auctions of timber contracts supports this prediction and rejects standard models that ignore resale. The estimated effect is smaller after policy changes expected to diminish the prevalence of resale. Additional evidence supports the predicted presence of a common value element introduced by the resale opportunity. (JEL D44, D82, C52, L73)