Low-bid Auction Versus High-bid Auction For Siting Noxious Facilities in a Two-city Region: an Exact Approach

Two auctions have been proposed in the literature for siting noxious facilities: the high-bid and the low-bid auctions. In this paper, we pursue the analysis of these auctions made by O'Sullivan [1993], where he concludes that the high-bid auction has the edge over the low-bid auction. We point out that O'Sullivan has made an approximation for the expected value of the compensation obtained with the high-bid auction, and we show how to obtain the exact value. We discuss a paradox linked with O'Sullivan's result, which mitigates his conclusions, and we show that with exact compensation, the high-bid auction mechanism is indeed far superior to the low-bid auction
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