Estimating Auctions with Externalities: The Case of USFS Timber Auctions

Abstract

Abstract I introduce an empirical auction model where in addition to the private value that each bidder receives upon winning the auction, losing bidders incur a negative externality that depends on the identity of the rival winner. I show how the externalities and private value distributions can be identified and estimated in such a model. I then apply the model to U.S. Forest Service timber auctions. I find that mill bidders impose significant externalities on one another of between 10% and 22% of the heterogeneous portion of their valuation. This leads the timber tracts to be misallocated in 5.2% of the auctions in my sample.