Common Values, Unobserved Heterogeneity, and Endogenous Entry in US Offshore Oil Lease Auctions

Abstract

Although an auction of drilling rights is often cited as an example of common values, formal evidence has been limited by the problem of auction-level unobserved heterogeneity. We develop an empirical approach for first-price sealed-bid auctions with affiliated values, unobserved heterogeneity, and endogenous bidder entry. We show that important features of the model are nonparametrically identified and apply a semiparametric estimation approach to data from US offshore oil and gas lease auctions. We find that common values, affiliated private information, and unobserved heterogeneity are all present. Failing to account for unobserved heterogeneity obscures the evidence of common values. We examine implications of our estimates for the interaction between affiliation, the winner’s curse, the auction rules, and the number of bidders in determining the aggressiveness of bidding and seller revenue.