The Dean is looking for a tenured professor. Monetary incentives are needed to get someone interested, but how much? The Dean decides to use an auction to do the job. Two professors, equally qualified, applied for the position. The two professors are invited to covertly submit their bids to the Dean. The Dean will give the position to the professor who submits the lower bid (if there is a tie, the job is assigned randomly). The professor who gets the job will be paid his/her own bid. Each professor's reservation value for teaching the course is his/her private information. It is common knowledge that their reservation values are independently and uniformly distributed over [0,100]. So if a professor with a reservation value of 60 wins with a bid of 50, his payoff is 60 - 50 = 10.
(a) Find a Bayesian Nash equilibrium of the bidding game.
(b) Suppose the two professors' reservation values are 60 and 70, respectively. What are their bids in the Bayesian Nash equilibrium you
computed in part (a)? Who is the winner? What's the payoff of the
winner?
(c) The faculty committee dislikes the auction rule. They propose to
modify the auction slightly. Instead of the winner getting paid his/her
own bid, the winner is paid his own bid plus a 10% premium.
i. Find a Bayesian Nash equilibrium of the bidding game.
ii. Suppose the two professors' reservation values are 60 and 70,
respectively. What are their bids in the Bayesian Nash equilibrium you computed in part (c)? Who is the winner? What's the
payoff of the winner?
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