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Theory and Individual Behavior of First-Price Auctions

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  • Cox, James C
  • Smith, Vernon L
  • Walker, James M

Abstract

First-price auction theory is extended to the case of heterogeneous bidders characterized by M-parameter log-concave utility functions. This model, and its specific two-parameter constant relative risk averse special case, is generally supported by the results of 47 experiments. The one-parameter special case that comprises most of the theoretical literature is not supported by the experiments. One anomaly for the two-parameter model is that too many of the subjects exhibit positive (or negative) intercepts in their linear estimated bid functions. Accordingly, we develop a specific three-parameter model, which introduces a utility of winning, and a threshold utility of surplus. The new model, tested directly by introducing lump-sum payments or charges for winning, is not falsified by the new experiments. Copyright 1988 by Kluwer Academic Publishers

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Bibliographic Info

Article provided by Springer in its journal Journal of Risk and Uncertainty.

Volume (Year): 1 (1988)
Issue (Month): 1 (March)
Pages: 61-99

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Handle: RePEc:kap:jrisku:v:1:y:1988:i:1:p:61-99

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Web page: http://www.springerlink.com/link.asp?id=100299

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