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Bidding in common value auctions: How the commercial construction industry corrects for the winner's curse

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  • Douglas Dyer
  • John Kagel

Abstract

Experienced construction industry executives suffer from a winner's curse in laboratory common value auction markets (Dyer et al. [Dyer, D., J. H. Kagel, D. Levin. 1989. A comparison of naive and experienced bidders in common value offer auctions: Laboratory analysis. Econom. J. 99 108–115.]). This paper identifies essential differences between field environments and the economic theory underlying the laboratory markets that account for the executives' success in the field and a winner's curse in the lab. These are (1) industry-specific mechanisms which enable contractors to escape the winner's curse even when they bid too low, (2) learned, industry-specific evaluative processes which enable experienced contractors to avoid the winner's curse in the first place, and (3) important private value elements that underlie bidding. Also identified are a number of industry-specific bidding characteristics whose evolution can be explained using modern auction theory. Lessons are drawn regarding the use of experimental methods in economics.

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Bibliographic Info

Paper provided by The Field Experiments Website in its series Framed Field Experiments with number 00144.

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Date of creation: 1996
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Handle: RePEc:feb:framed:00144

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Web page: http://www.fieldexperiments.com

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Cited by:
  1. GlennW. Harrison & JohnA. List, 2008. "Naturally Occurring Markets and Exogenous Laboratory Experiments: A Case Study of the Winner's Curse," Economic Journal, Royal Economic Society, vol. 118(528), pages 822-843, 04.
  2. Alan Mehlenbacher, 2007. "Multiagent System Platform for Auction Simulations," Department Discussion Papers 0706, Department of Economics, University of Victoria.
  3. Levati, Maria Vittoria & Miettinen, Topi & Rai, Birendra, 2011. "Context and interpretation in laboratory experiments: The case of reciprocity," Journal of Economic Psychology, Elsevier, vol. 32(5), pages 846-856.
  4. João Adelino Ribeiro & Paulo Jorge Pereira & Elísio Brandão, 2013. "Volume Uncertainty in Construction Projects: a Real Options Approach," CEF.UP Working Papers 1309, Universidade do Porto, Faculdade de Economia do Porto.
  5. Fangcheng Tang & Weizhou Zhong & Shunfeng Song, 2006. "Tenders with Different Risk Preferences in Construction Industry," Working Papers 06-006, University of Nevada, Reno, Department of Economics & University of Nevada, Reno , Department of Resource Economics.

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