Games and Economic Behavior 75 (2012) 104–119 Contents lists available at SciVerse ScienceDirect Games and Economic Behavior www.elsevier.com/locate/geb Efficient investment in a dynamic auction environment ✩ Brendan Daley a,∗ , Michael Schwarz b , Konstantin Sonin c a Duke University, Fuqua School of Business, NC, United States b Yahoo! Labs c New Economic School, Russia article info abstract Article history: Received 22 November 2011 Available online 6 December 2011 JEL classification: D44 D82 Keywords: Auctions Efficient mechanism design Signaling We analyze an environment in which bidders’ private values change over time due to both private investments and exogenous shocks. We demonstrate that a highly- decentralized mechanism achieves efficiency. The mechanism requires a stage of costly public announcements (i.e., signaling) to induce efficient investment. For this reason, an equilibrium selection issue arises, but can be handled by a minor modification in the spirit of virtual implementation.  2011 Elsevier Inc. All rights reserved. 1. Introduction A single, indivisible good will be available for use at some future date. If it were allocated today, each of its potential owners (call them bidders) would have some privately-known value for it. However, in the interim period each bidder’s value can fluctuate based on two factors: • Exogenous shocks. Over time, bidders’ circumstances, information, and (therefore) values may change. • Investment in complimentary assets. Interested bidders have the opportunity to invest in assets or technologies that will enhance their value for the available good. Of course, the bidder must be allocated the good for the investment decision to pay off. For example, a commercial property will be available on a certain date. The value of the location to a given business will fluctuate based on exogenous market conditions. In addition, if a business were assured the location, it would engage in costly advertising for its “Grand Opening.” This investment is purely wasted if it does not receive the location. Or, a house will be available to move into on a future date. Before the house becomes available, bidders may have opportunities to buy other houses, essentially removing themselves from the market. We can consider “not buying another house” as an action that boosts a bidder’s value (where the cost of the action is the forgone surplus of not buying a different house). ✩ An earlier version of this paper circulated under the title “The Variable Value Environment: Auctions and Actions.” The authors are grateful to Rick Ericson, Drew Fudenberg, Giuseppe Lopomo, Eric Maskin, Paul Milgrom, Anna Mikoucheva, Eric Rasmusen, Mike Riordan, Ilya Segal, Thomas Sjostrom, Eric Stout, Jeroen Swinkels, Robert Townsend, and seminar participants at Harvard, MIT, and Columbia. * Corresponding author. E-mail addresses: bd28@duke.edu (B. Daley), mschwarz@yahoo-inc.com (M. Schwarz), ksonin@gmail.com (K. Sonin). 0899-8256/$ – see front matter  2011 Elsevier Inc. All rights reserved. doi:10.1016/j.geb.2011.11.006