Série des Documents de Travail n° 2019-15 Distinguishing Incentive from Selection Effects in Auction-Determined Contracts Laurent LAMY1 Manasa PATNAM2 Michael VISSER3 Les documents de travail ne reflètent pas la position du CREST et n'engagent que leurs auteurs. Working papers do not reflect the position of CREST but only the views of the authors. 1 CIRED, Ecole des Ponts, ParisTech. E-mail :
[email protected] 2 IMF. E-mail :
[email protected] 3 CREST; ENSAE; CRED, University of Paris 2. E-mail :
[email protected] Distinguishing Incentive from Selection Effects in Auction-Determined Contracts ∗ Laurent Lamy† Manasa Patnam ‡ Michael Visser§ September 20, 2019 Abstract This paper develops a novel approach to estimate how contract and principal-agent characteristics influence an ex-post performance outcome when the matching between agents and principals derives from an auction process. We propose a control-function ap- proach to account for the endogeneity of contracts and matching. This consists of, first, estimating the primitives of an interdependent values auction model - which is shown to be non-parametrically identified from the bidding data - second, constructing control func- tions based on the distribution of the unobserved private signals conditional on the auction outcome. A Monte Carlo study shows that our augmented outcome equation corrects well of the endogeneity biases, even in small samples. We apply our methodology to a labor market application: we estimate the effect of sports players’ auction-determined wages on their individual performance. Keywords: Econometrics of Contracts, Econometrics of Auctions; Structural Econometrics; Endogenous Matching; Polychotomous Sample Selection; Wage-Performance Elasticity.