Optimal Common Value Auctions with Asymmetric Bidders

How do informational asymmetries between bidders affect the outcome of common value auctions? Should the seller accept bids from bidders with more precise information? If so, under what conditions? What effect do such asymmetries have on the seller’s expected revenue? We analyze these questions in a simple model in which an insider competes with an outsider. Both have some information about the value of the asset for sale, but the insider’s information is more precise. We derive the optimal mechanism and show that it must be biased against the insider. With an optimal mechanism, the seller’s expected revenue is higher if the bidders are more asymmetrically informed. We show how the optimal mechanism can be implemented as a second-price sealed bid auction that lets the insider win only if his bid is above a hurdle price