Governance and game theory: When do franchise auctions induce firms to overbid?

The use of auctions as an instrument of public policy has been hailed as evidence of the utility and validity of game theory. In this paper, we focus on extreme cases – centrally, spectrum auctions in the UK and Germany in 2000 – to argue that the canonical game theoretic interpretations of firm behaviour in some (highly “successful”) auction outcomes are inadequate, that the economics of governance critique of franchise bidding can be extended to provide a better interpretation, and that under specified conditions, notably high uncertainty, policy-makers should design franchise auctions to avoid overbidding, rather than attend to the more conventional challenge of underbidding.