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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?

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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 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.

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  • $\begingroup$ 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." $\endgroup$ – Ubiquitous Jan 19 '15 at 14:47

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