Recurring Auctions with Costly Entry: Theory and Evidence

Recurring auctions are ubiquitous for selling durable assets, such as land, home, or artwork: When the seller cannot sell the item in the initial auction, she often holds a subsequent auction in the near future. This paper characterizes the design of recurring auctions, both theoretically and empirically. On the theoretical side, we show that recurring auctions outperform single-round auctions in efficiency and revenue when potential buyers face costly entry. This occurs because recurring auctions allow potential buyers with different values to enter at different times, which generates savings in entry costs and increases the overall probability of sale. We further derive the optimal sequence of reserve prices in recurring auctions, depending on whether the seller aims to maximize efficiency or revenue. On the empirical side, we apply the theory to home foreclosure auctions in China, where a foreclosed home is auctioned up to three times in a row. After estimating structural parameters in a recurring auction model, we compare the observed recurring auctions to the counterfactual single-round auctions. We show that the recurring auction design leads to an annual efficiency gain of 3.40 billion USD (16.60%) and an annual revenue gain of 2.97 billion USD (15.92%) in China, relative to single-round auctions. Using the optimal reserve price sequences derived from our model can further improve efficiency by 0.80 billion USD (3.35%) and revenue by 0.66 billion USD (3.06%), respectively.