Bidding Rings and the Winner's Curse: The Case of Federal Offshore Oil and Gas Lease Auctions

Ken Hendricks, Robert Porter, Guofu Tan

NBER Working Paper No. 9836
Issued in July 2003
NBER Program(s):Industrial Organization Program

This paper extends the theory of legal cartels to affiliated private value and common value environments, and applies the theory to explain joint bidding patterns in U.S. federal government offshore oil and gas lease auctions. We show that efficient collusion is always possible in private value environments, but may not be in common value environments. In the latter case, fear of the winner's curse can cause bidders not to bid, which leads to inefficient trade. Buyers with high signals may be better off if no one colludes. The bid data is consistent with oil and gas leases being common value assets, and with the prediction that the winner's curse can prevent rings from forming on marginal tracts.

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Document Object Identifier (DOI): 10.3386/w9836

Published: Hendricks, Ken, Robert Porter, and Guofu Tan. “Bidding Rings and the Winner’s Curse." RAND Journal of Economics 39, 4 (Winter 2008): 1018-1041.

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