Bidder's private value distributions in standing timber auctions in the Jiangxi Province of China

Timber auctions are quite recent in China. In 2009, Jiangxi Province started the first forest rights trading centers; timber auctions conducted through these trading centers have some features different from timber auctions in the developed world. As good auction design is context-specific, for Jiangxi's timber auctions, we (i) examine the appropriateness of using the independent private value (IPV) framework, (ii) test the endogeneity of the number of bidders in the sealed-bid auctions, and (iii) examine the effect of heterogeneity of timber stands being sold. We use data from first-price sealed-bid and open ascendingprice timber auctions from 2009 to 2012. Univariate and conditional kernel density estimators are used to estimate bidder's private value distributions using IPV framework. Our results suggest that the key assumption of IPV framework does not hold, confirm the endogenous determination of number of bidders, and support the need to incorporate timber stand heterogeneity in private value analysis. Our results also show that neither format of auctions dominates for seller's revenue and the seller's revenue is not a monotonic increasing function of the number of bidders. We suggest that a seller should account for local forest and market conditions in the selection of auction format and the reserve price should be set by taking endogenous entry and local competition level into account.