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Endogenous Entry and Self-selection in Private Value Auctions: An Experimental Study

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Author Info
Palfrey, Thomas R.
Pevnitskaya, Svetlana

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Abstract

This paper presents the results of an experimental study of endogenous entry and bidding behavior in first-price independent private value auctions. In the first stage N potential bidders simultaneously decide whether to participate in an auction or to claim a fixed outside option. At this stage all potential bidders know N, the distribution of possible values, and the value of the outside option. In the second stage, each entering bidder submits a bid after learning their own private value for the object and the number of entering bidders. We find evidence of self-selection effect, as predicted by an equilibrium model of heterogeneous risk averse bidders. The theoretical model predicts that bidding in the auction will be lower with endogenous entry because only the less risk averse bidders will choose to enter. We also find that entry decreases with the value of the outside option, as predicted. One surprising finding is that we observe over-entry relative to the theoretical predictions.

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Publisher Info
Paper provided by California Institute of Technology, Division of the Humanities and Social Sciences in its series Working Papers with number 1172.

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Length: 33 pages
Date of creation: Aug 2003
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Publication status: Published:
Handle: RePEc:clt:sswopa:1172

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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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Related research
Keywords: auctions; experimental economics; game theory;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. McAfee, R. Preston & McMillan, John, 1987. "Auctions with a stochastic number of bidders," Journal of Economic Theory, Elsevier, vol. 43(1), pages 1-19, October. [Downloadable!] (restricted)
  2. Cox, James C & Smith, Vernon L & Walker, James M, 1992. "Theory and Misbehavior of First-Price Auctions: Comment," American Economic Review, American Economic Association, vol. 82(5), pages 1392-412, December. [Downloadable!] (restricted)
  3. Goeree, Jacob K. & Holt, Charles A. & Palfrey, Thomas R., 2002. "Quantal Response Equilibrium and Overbidding in Private-Value Auctions," Journal of Economic Theory, Elsevier, vol. 104(1), pages 247-272, May. [Downloadable!] (restricted)
    Other versions:
  4. James Cox & Sam Dinkin & James Swarthout, 2001. "Endogenous Entry and Exit in Common Value Auctions," Experimental Economics, Springer, vol. 4(2), pages 163-181, October. [Downloadable!] (restricted)
  5. McAfee, R. Preston & McMillan, John, 1987. "Auctions with entry," Economics Letters, Elsevier, vol. 23(4), pages 343-347. [Downloadable!] (restricted)
  6. Jacob K. Goeree & Charles A. Holt, 2000. "An Explanation of Anomalous Behavior in Binary-Choice Games: Entry, Voting, Public Goods, and the Volunteers' Dilemma," Virginia Economics Online Papers 328, University of Virginia, Department of Economics. [Downloadable!]
  7. Levin, Dan & Smith, James L, 1994. "Equilibrium in Auctions with Entry," American Economic Review, American Economic Association, vol. 84(3), pages 585-99, June. [Downloadable!] (restricted)
  8. Friedman, Daniel, 1992. "Theory and Misbehavior of First-Price Auctions: Comment," American Economic Review, American Economic Association, vol. 82(5), pages 1374-78, December. [Downloadable!] (restricted)
  9. Cox, James C & Smith, Vernon L & Walker, James M, 1988. " Theory and Individual Behavior of First-Price Auctions," Journal of Risk and Uncertainty, Springer, vol. 1(1), pages 61-99, March.
  10. Harrison, Glenn W, 1992. "Theory and Misbehavior of First-Price Auctions: Reply," American Economic Review, American Economic Association, vol. 82(5), pages 1426-43, December. [Downloadable!] (restricted)
  11. Harstad, Ronald M. & Kagel, John H. & Levin, Dan, 1990. "Equilibrium bid functions for auctions with an uncertain number of bidders," Economics Letters, Elsevier, vol. 33(1), pages 35-40, May. [Downloadable!] (restricted)
  12. Thomas Palfrey, 2002. "Quantal Response Equilibrium and Overbidding in Private Value Auctions," Theory workshop papers 357966000000000089, UCLA Department of Economics. [Downloadable!]
  13. 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. [Downloadable!] (restricted)
  14. Harrison, Glenn W, 1989. "Theory and Misbehavior of First-Price Auctions," American Economic Review, American Economic Association, vol. 79(4), pages 749-62, September. [Downloadable!] (restricted)
  15. Kagel, John H & Roth, Alvin E, 1992. "Theory and Misbehavior in First-Price Auctions: Comment," American Economic Review, American Economic Association, vol. 82(5), pages 1379-91, December. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Radosveta Ivanova-Stenzel & Timothy C. Salmon, 2006. "Revenue Equivalence Revisited," Discussion Papers 175, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
    Other versions:
  2. Edward Lazear & Ulrike Malmendier & Roberto Weber, 2006. "Sorting in Experiments with Application to Social Preferences," NBER Working Papers 12041, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Radosveta Ivanova-Stenzel & Timothy Salmon, 2009. "The High/Low Divide: Self-Selection by Values in Auction Choice," Working Papers wp2009_06_02, Department of Economics, Florida State University. [Downloadable!]
  4. R. Mark Isaac & Svetlana Pevnitskaya & Kurt Schnier, 2008. "Individual Behaavior and Bidding Heterogeneity in Sealed Bid Auctions Where the Number of Bidders is Unknown," Working Papers wp2008_07_02, Department of Economics, Florida State University. [Downloadable!]
  5. Glenn W. Harrison & Morten I. Lau & E. Elisabet Rutstrom, 2005. "Risk Attitudes, Randomization to Treatment, and Self-Selection Into Experiments," Artefactual Field Experiments 0052, The Field Experiments Website. [Downloadable!]
  6. Radosveta Ivanova-Stenzel & Timothy C. Salmon, 2006. "Anomalies in Auction Choice Behavior," Discussion Papers 174, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
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