Another explanation for overbidding and another bias for underbidding in first-price auctions
AbstractFirst-price auction experiments find often substantial overbidding which is typically related to risk aversion. We introduce a model where some bidders use constrained linear bids. As with risk aversion this leads to overbidding if valuations are high, but in contrast to risk aversion the model predicts underbidding if valuations are low. We test this model with the help of experiments, compare bidding in first-price and second-price auctions and study revenue under different treatments. We conclude that at least part of the commonly observed overbidding is an artefact of experimental setups which rule out underbidding. Constrained linear bids seem to fit observations better
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Bibliographic InfoPaper provided by Centre for Research into Industry, Enterprise, Finance and the Firm in its series CRIEFF Discussion Papers with number 0606.
Date of creation: Jun 2006
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Auction; Experiment; Overbidding; Underbidding; Risk-Aversion;
Find related papers by JEL classification:
- C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-10-21 (All new papers)
- NEP-EXP-2006-10-21 (Experimental Economics)
- NEP-UPT-2006-10-21 (Utility Models & Prospect Theory)
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- Garratt, Rod & Walker, Mark & Wooders, John, 2004.
"Behavior in Second-Price Auctions by Highly Experienced eBay Buyers and Sellers,"
University of California at Santa Barbara, Economics Working Paper Series
qt7s72r56p, Department of Economics, UC Santa Barbara.
- Rodney Garratt & Mark Walker & John Wooders, 2012. "Behavior in second-price auctions by highly experienced eBay buyers and sellers," Experimental Economics, Springer, vol. 15(1), pages 44-57, March.
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