Bidding and Drilling under Uncertainty: An Empirical Analysis of Contingent Payment Auctions

Vivek Bhattacharya, Andrey Ordin, James W. Roberts

Research output: Contribution to journalArticlepeer-review

Abstract

Auctions are often used to sell assets whose future cash flows require the winner to make postauction investments. When winners’ payments are contingent on these cash flows, auction design can influence both bidding and incentives to exert effort after the auction. We propose a model of contingent payment auctions that links auction design to postauction economic activity. In the context of oil leases in the Permian Basin, we show that moral hazard affects the relative revenue ranking of different auction designs. Among a large class of alternatives, the observed design cannot be changed to increase both revenues and drilling rates.

Original languageEnglish (US)
Pages (from-to)1319-1363
Number of pages45
JournalJournal of Political Economy
Volume130
Issue number5
DOIs
StatePublished - May 2022

ASJC Scopus subject areas

  • Economics and Econometrics

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