An All-Pay Auction

There’s an all-pay auction unfolding before our eyes, and the bidders are factions within the Democratic party.

All-pay auctions are like conventional auctions in that the highest bidder gets the prize and pays the winning bid, but with one important difference—even the losing bidders, who get no prize, must pay their respective bids.

You won’t see such auctions at Christie’s or Sotheby’s but they are arguably more important in economic and political life than conventional auctions. When parties with opposing interests lobby for or against a piece of legislation, the losing party cannot recover the money paid to lobbyists. When multiple pharmaceutical companies race to develop a lucrative drug, the one to get there first captures the market but the others don’t get their investments back. When two countries go to war, it is not just the winner who pays in lives and treasure. And so on.

To get a sense of how the structure of all-pay auctions can lead to some terribly self-defeating behavior, consider the following simple experiment. Standing before a fairly large audience, you take out a crisp twenty dollar bill and announce that it will be sold to the highest bidder, but that all bidders will have to pay what they bid. Initial bids are typically small, just a few pennies. But as the bidding proceeds, you get to a point where the sum of all bids exceeds the value of the prize. For example, if the top two bids are $11 and $10 respectively, one bidder stands to gain nine and the other to lose ten. The lower bidder thus has an incentive to keep going, bidding $12 for example, switching from a loss of ten to a gain of eight. But the one now pushed into second place (losing eleven) can counter by bidding $13, switching to a gain of seven. And so the contest continues, until all but one person has accepted their losses and given up.

It is not unusual in such experiments for the highest bid (and even some that are not the highest) to vastly exceed the value of the prize.

The struggle to replace or retain Joe Biden as the official nominee of the Democratic party has a similar flavor. As long as each faction believes that a bit more effort will cause the others to give up, the expenditure seems worthwhile. But unlike the textbook all-pay auction in which only the contestants make payments, the costs of this competition are being paid by the party membership as a whole, and others who would like to see it prevail in November. If the president succeeds in remaining at the top of the ticket, he will do so bloodied and bruised, with little prospect of success. And if he succumbs to the pressure to step aside, whoever replaces him will have to contend with his anger and resentment, and that of his most loyal supporters.

The tug-of-war is taking place in full view of the public, with every lurch documented on social media and reflected in prediction market prices. The chart below shows prices for contracts that pay a dollar if Biden is the eventual nominee, and nothing otherwise. You can see that well over a million contracts were traded a couple of days ago, and more than half a million on days with significant movements, including the day of the debate. Every confident assertion that the matter is closed has led to a discernible rise in the implied probability of the event, only to be reversed in short order:

I am not an expert on such matters by any means, but it seems to me that if the party is to have any hope of success, the president has to take the initiative, throw his weight behind his vice-president (or some other process for selecting a nominee), lead the transition, play a starring role at the convention, and be given the dignity and respect that he feels is his due. Someone in whom he retains trust and confidence has to guide and assist him in this; Senator Coons comes to mind. And the negotiations with other party leaders have to be conducted outside the glare of media scrutiny.

Responding to reports of Biden’s anger and frustration, Josh Marshall had this to say:

I think it’s the best thing now for his party, his country and his legacy to step aside. But many who he stood by and was loyal to have acted like hyenas toward him in return. And others who never liked him mauled him when he was down. No point denying that.

Marshall’s comment explains Biden’s psychological state, and his refusal to comply with the avalanche of demands to step aside. But at some point one side or the other has to accept an outcome they would prefer to avoid, and the longer it takes for the process to end, the more damage will be left in its wake.