The role of auctions in allocating public resources
Staff research paper
This paper by Chris Chan, Patrick Laplagne and David Appels was released on 20 February 2003. The paper provides an economic framework with which to consider the effectiveness and imitations of auction markets in allocating public resources.
It links auction outcomes to bidders’ behavioural characteristics and to the lack or imbalance of information available to governments and bidders.
The analysis covers the key elements of an auction, including the auction form, the auction environment, the bidding behaviour and the implications for allocative efficiency and revenue.
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Governments in Australia and elsewhere increasingly recognise the potential of auctions as a policy tool for allocating public resources.
Well-designed auctions can promote efficient allocation of resources without requiring governments to have prior knowledge of resource values or costs. Compared with administrative allocations, auctions are more transparent and less dependent on officials' subjective judgment, and can yield greater revenues or cost savings for governments.
Success of government auctions depends on having a thorough understanding of bidding behaviour and paying close attention to auction design. Simple auction forms can cope with a simple environment but may not apply generally.
Auction theory provides a framework for developing practical design guidelines. Individuals competing for public resources often have the incentive and ability to misrepresent resource values or costs. Auction design is about devising bidding rules to address such incentive problems and their implications for revenue and allocative efficiency.
Public funds for conservation activities can be allocated through an auction in which landholders compete on compensation, land areas conserved and site-specific conservation benefits. In this application, auction design involves the following issues:
- how to realise synergies from conserving adjacent lands that belong to different landholders
- how to minimise disbursements
- how to use information on conservation benefits in selecting bids.
In auctioning rights to use radio-spectrum, bidders should be allowed to combine spectrum lots in the most efficient way. Synergies exist in the use of spectrum in Australia. This finding strengthens the case for package bidding in spectrum auctions.
Background information
Patrick Jomini (Assistant Commissioner) 03 9653 2176
