Information Design in Common Value Auction With Moral Hazard: Application to OCS Leasing Auctions
Abstract
This paper explores the impact of information design on the auctioneer's revenue in the U.S. offshore oil/gas lease auctions where, post‐auction, the winner decides whether to explore the auctioned tract and must pay the government a royalty on its production value. I first document that there is a positive correlation between the exploration rate and publicly observed losing bids. This suggests that the winning bidder uses the rivals' bids to infer their private information about the tract's potential. I then characterize the equilibrium bidding strategy when the auctioneer designs and commits to how to reveal information on losing bids to the winning bidder. Counterfactual exercises reveal that alternative bid disclosure policies significantly improve auctioneer revenue.