Monday, October 18, 2010

Name That Model

Whenever the renters of self-storage units default on their payments, the owner has the right to sell the contents of the units to the highest bidder. In some states, potential buyers are prohibited from examining the detailed contents of the units; rather, they are merely allowed to "peek" inside before the bidding process starts.

The type of auction described above is an example of a more general situation that economists have studied and modeled. Can you identify the relevant model? What does the model suggest is the optimal bidding strategy in such situations? Winners of such auctions are often said to suffer from a particular fate--can you name it?

Congratulations to Yuan Tao--a three-time winner this semester--for correctly identifying the common value auction (and its associated "winner's curse").