In 1961, William Vickrey showed that, in an independent private-values context with symmetric risk-neutral bidders, sealed second-price auctions have dominant truth-revealing equilibrium strategies; are perfectly efficient economically; and produce the same expected revenue for bid takers as equilibrium strategies in oral progressive auctions, Dutch auctions, or standard, first-price sealed bidding. Yet sealed second-price auctions seldom occur. The authors argue that fear of cheating and especially disincentives for bidders to follow truth-revealing strategies are important explanations. They model auctions in which third parties capture a fraction of the economic rent revealed by the second-price procedure. Copyright 1990 by University of Chicago Press.

In 1961, Vickrey showed that, in an independent private-values context with symmetric risk-neutral bidders, sealed second-price auctions have dominant truth-revealing equilibrium strategies, that they are perfectly efficient economically, and that they produce the same expected revenue for bid takers as equilibrium strategies in oral progressive auctions, Dutch auctions, or standard, first-price sealed bidding. Yet sealed second-price auctions seldom occur. We argue that fear of cheating and especially disincentives for bidders to follow truth-revealing strategies are important explanations. We model auctions in which third parties capture a fraction of the economic rent revealed by the second-price procedure.