Efficiency versus Transaction Costs in Multidimensional Auctions: The case of Brazilian oil and gas lease auctions

by Miguel Vazquez and Michelle Hallack

In Brazil, a scoring auction decides which firm has the right to explore oil and gas in a region. One of its dimensions is the amount of local content that firms are willing to implement. However, local content programs are subject to significant uncertainty and complexity so mal-adaptation costs are relevant. We characterize players’ bidding behavior when they have information on local content implementation and when they do not. We test those predictions using historical bids. Our tests suggest that the mechanism would be more efficient if the definition of local content programs was left out of the auction.