<p>The linkage principle does not depend on risk-aversion, because risk-neutral bidders simply bid according to the expected value they assign to the auctioned object. Having private information not revealed to other bidders, will generate information rents, reduce competition among bidders and lead to lower seller revenue.</p>

<p>Daniel Quint (U. Wisconson, eBay) has some <a href="http://www.ssc.wisc.edu/~dquint/econ805%202009/lectures/econ%20805%20lecture%209.pdf" rel="nofollow"><strong>lectures notes</strong></a> where he works out the Milgrom-Weber result in detail, and also gives the following intuitive explanation: </p>

<blockquote>
  <p>One way to think about this is that bidder’s expected payoff can be
  thought of as his “information  rents,” that is, the extra surplus he
  is able to get by having private information. But in auction formats
  where information is revealed which is correlated with his private
  information, his private information becomes “less private” in a
  sense, so he gets a smaller surplus, and therefore more goes to the
  seller. In the logical limit – where information revealed over the
  course of the auction fully reveals the highest type – the seller
  could simply make a take-it-or-leave-it offer to extract full surplus.</p>
</blockquote>

CC BY-SA 3.0
2015-01-19T14:47:44.713Z
Thanks, I think this makes the intuition quite clear: "But in auction formats where information is revealed which is correlated with his private information, his private information becomes “less private” in a sense, so he gets a smaller surplus, and therefore more goes to the seller."
Ubiquitous
CC BY-SA 3.0
2015-01-18T20:20:08.040Z
2015-01-18T20:20:08.040Z
TemplateRex
<p>An important result in auction theory is Milgrom &amp; Weber's <em>linkage principle</em>, which, roughly, holds that the expected revenue from an auction is higher is the seller commits ex ante to reveal as much information about the good for sale as possible.</p>

<p>I am trying to understand why this should be true even if bidders are risk-neutral and care only about the expected difference between their value and the price paid.</p>

<p>Is anyone able to provide some intuition for this result?</p>

<microeconomics><theory><auctions>
Intuition behind the linkage principle
Ubiquitous
# Intuition behind the linkage principle

(Asked by: username_0 on 2015-01-18)

An important result in auction theory is Milgrom & Weber's *linkage principle*, which, roughly, holds that the expected revenue from an auction is higher is the seller commits ex ante to reveal as much information about the good for sale as possible.

I am trying to understand why this should be true even if bidders are risk-neutral and care only about the expected difference between their value and the price paid.

Is anyone able to provide some intuition for this result?

**Tags:** microeconomics, theory, auctions

---

## 1 answers

### Answer by username_1 on 2015-01-18. Score: 3 | Accepted answer

The linkage principle does not depend on risk-aversion, because risk-neutral bidders simply bid according to the expected value they assign to the auctioned object. Having private information not revealed to other bidders, will generate information rents, reduce competition among bidders and lead to lower seller revenue.

Daniel Quint (U. Wisconson, eBay) has some [**lectures notes**](http://www.ssc.wisc.edu/~dquint/econ805%202009/lectures/econ%20805%20lecture%209.pdf) where he works out the Milgrom-Weber result in detail, and also gives the following intuitive explanation:

> One way to think about this is that bidder’s expected payoff can be
> thought of as his “information rents,” that is, the extra surplus he
> is able to get by having private information. But in auction formats
> where information is revealed which is correlated with his private
> information, his private information becomes “less private” in a
> sense, so he gets a smaller surplus, and therefore more goes to the
> seller. In the logical limit – where information revealed over the
> course of the auction fully reveals the highest type – the seller
> could simply make a take-it-or-leave-it offer to extract full surplus.

> **Comments:**
> **username_0**: Thanks, I think this makes the intuition quite clear: "But in auction formats where information is revealed which is correlated with his private information, his private information becomes “less private” in a sense, so he gets a smaller surplus, and therefore more goes to the seller."  

---

