Auction Equilibrium with Costly Information Acquisition

Rolando M. Guzman   and   Charles D. Kolstad*

Revised Version:   January 1997

ABSTRACT

This paper presents a simple model of auction equilibrium. The distinctive feature of the model is that each bidder may discover the value that the item represents for herself, provided she spends some amount in order to be well informed. For each agent, the decision of whether or not to acquire information depends on a private cost of information acquisition and on her conjectures regarding the behavior of other bidders. A rational expectations equilibrium is characterized.


*   Department of Economics, University of Illinois at Urbana-Champaign and Department of Economics, University of California at Santa Barbara. Research supported in part by NSF Grant SBR-9496303. The authors appreciate comments from Richard Engelbrecht-Wiggans, Charles Kahn, and Steven Williams on an earlier version of this paper. A helpful suggestion from Adolf Hildenbrand is also acknowledged. None of them bears responsibilities for shortcomings or omissions.
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