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Quantal Response Equilibrium and Overbidding in Private-value Auctions

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  • Palfrey, Thomas R.
  • Goeree, Jacob
  • Holt, Charles

Abstract

This paper reports the results of a private-values auction experiment in which expected costs of deviating from the Nash equilibrium bidding function are asymmetric, with the implication that upward deviations will be more likely in one treatment than in the other. Overbidding is observed in both treatments, but is more prevalent in the treatment where the costs of overbidding are lower. We specify and estimate a noisy (quantal response) model of equilibrium behavior. Estimated noise and risk aversion parameters are highly significant and consistent across treatments. The resulting two-parameter model tracks both the average bids and the distribution of bids remarkably well. Alternative explanations of overbidding are also considered. The estimates of parameters from a nonlinear probability weighting function yield a formulation that is essentially equivalent to risk aversion in this context. A model in which players experience a "joy of winning" provides a reasonable fit of the data but does significantly worse than the risk aversion model.

(This abstract was borrowed from another version of this item.)

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Bibliographic Info

Paper provided by California Institute of Technology, Division of the Humanities and Social Sciences in its series Working Papers with number 1073.

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Date of creation: Feb 2000
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Publication status: Published: Journal of Economic Theory , Vol. 104, pp. 247-272 (2002)
Handle: RePEc:clt:sswopa:1073

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Postal: Working Paper Assistant, Division of the Humanities and Social Sciences, 228-77, Caltech, Pasadena CA 91125
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Postal: Working Paper Assistant, Division of the Humanities and Social Sciences, 228-77, Caltech, Pasadena CA 91125
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  2. Merlo, Antonio & Schotter, Andrew, 1992. "Theory and Misbehavior of First-Price Auctions: Comment," American Economic Review, American Economic Association, vol. 82(5), pages 1413-25, December.
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