Consider the following simple model of a common values auction. Two buyers each obtain a private signal about the value of an object. The signal can be either high (H) or low (L) with equal probability. If both obtain signal H, the object is worth 1; otherwise, it is worth 0.
a. What is the expected value of the object to a buyer who sees signal L? To a buyer who sees signal H?
b. Suppose buyers bid their expected value computed in part (a). Show that they earn negative profit conditional on observing signal H—an example of the winner’s curse.
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