Working Paper No. 00006-00
In many cases, buyers are not fully informed about their valuations and rely on the advice of biased experts. For example, the board of the bidder relies on the advice of managers when bidding for a target in a takeover contest. We study the design of sale mechanisms to such “advised buyers”. In static mechanisms, such as first- and second-price auctions, advisors communicate a coarsening of information, and the revenue equivalence theorem holds. In contrast, in dynamic mechanisms, advisors can communicate information gradually as the auction proceeds, which leads to more efficient allocations. Whether this leads to higher revenues depends on the bias. If advisors are biased for overbidding, an ascending-price auction dominates static formats in both efficiency and expected revenues. If advisors are biased for underbidding, a descending-price auction dominates static mechanisms in efficiency but often results in lower revenues.