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Can Relaxation of Beliefs Rationalize the Winner’s Curse?: An Experimental Study

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  • Asen Ivanov

    () (Department of Economics, VCU School of Business)

  • Dan Levin

    () (Department of Economics, The Ohio State University)

  • Muriel Niederle

    () (Stanford University)

Abstract

We use a second-price common-value auction, the maximal game, to experimentally study whether the Winner’s Curse (WC) can be explained by models which retain best-response behavior but allow for inconsistent beliefs. In the maximal game, the WC can be rationalized only by a belief that others use weakly-dominated strategies. Yet, we find that the WC is widespread. In addition, we create environments where, regardless of beliefs, there should be a correction of the WC. We find little evidence of such a correction. Overall, our study suggests that the WC, at least in initial periods of play in the laboratory, represents a more fundamental departure from NE than a mere inconsistency of beliefs.

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Paper provided by VCU School of Business, Department of Economics in its series Working Papers with number 0803.

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Publication status: Forthcoming in Econometrica
Handle: RePEc:vcu:wpaper:0803

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Keywords: common-value auctions; winner’s curse; beliefs; cursed equilibrium; level-k model; quantal response equilibrium;

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References

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  1. Vincent P. Crawford & Nagore Iriberri, 2007. "Level-k Auctions: Can a Nonequilibrium Model of Strategic Thinking Explain the Winner's Curse and Overbidding in Private-Value Auctions?," Econometrica, Econometric Society, vol. 75(6), pages 1721-1770, November.
  2. Boudreau, Bryan & Hendricks, Kenneth & Porter, Robert H., 1986. "Information, Returns, and Bidding Behavior in OCS Auctions: 1954-1969," Working Papers 86-25, C.V. Starr Center for Applied Economics, New York University.
  3. Dyer, Douglas & Kagel, John H & Levin, Dan, 1989. "A Comparison of Naive and Experienced Bidders in Common Value Offer Auctions: A Laboratory Analysis," Economic Journal, Royal Economic Society, vol. 99(394), pages 108-15, March.
  4. Stahl Dale O. & Wilson Paul W., 1995. "On Players' Models of Other Players: Theory and Experimental Evidence," Games and Economic Behavior, Elsevier, vol. 10(1), pages 218-254, July.
  5. Asen Ivanov & Dan Levin & James Peck, 2008. "Hindsight, Foresight, and Insight: An Experimental Study of a Small-Market Investment Game with Common and Private Values," Working Papers 0801, VCU School of Business, Department of Economics.
  6. Wolfgang Pesendorfer & Jeroen M. Swinkels, 1997. "The Loser's Curse and Information Aggregation in Common Value Auctions," Econometrica, Econometric Society, vol. 65(6), pages 1247-1282, November.
  7. Milgrom, Paul R & Weber, Robert J, 1982. "A Theory of Auctions and Competitive Bidding," Econometrica, Econometric Society, vol. 50(5), pages 1089-1122, September.
  8. Erik Eyster & Matthew Rabin, 2005. "Cursed Equilibrium," Econometrica, Econometric Society, vol. 73(5), pages 1623-1672, 09.
  9. Laffont, Jean-Jacques, 1997. "Game theory and empirical economics: The case of auction data 1," European Economic Review, Elsevier, vol. 41(1), pages 1-35, January.
  10. Wilson, Robert, 1992. "Strategic analysis of auctions," Handbook of Game Theory with Economic Applications, in: R.J. Aumann & S. Hart (ed.), Handbook of Game Theory with Economic Applications, edition 1, volume 1, chapter 8, pages 227-279 Elsevier.
  11. McAfee, R Preston & McMillan, John, 1987. "Auctions and Bidding," Journal of Economic Literature, American Economic Association, vol. 25(2), pages 699-738, June.
  12. Hendricks, Kenneth & Porter, Robert H, 1988. "An Empirical Study of an Auction with Asymmetric Information," American Economic Review, American Economic Association, vol. 78(5), pages 865-83, December.
  13. Nagel, Rosemarie, 1995. "Unraveling in Guessing Games: An Experimental Study," American Economic Review, American Economic Association, vol. 85(5), pages 1313-26, December.
  14. Lind, Barry & Plott, Charles R, 1991. "The Winner's Curse: Experiments with Buyers and with Sellers," American Economic Review, American Economic Association, vol. 81(1), pages 335-46, March.
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Cited by:
  1. Vincent P. Crawford & Miguel A. Costa-Gomes & Nagore Iriberri, 2010. "Strategic Thinking," Levine's Working Paper Archive 661465000000001148, David K. Levine.
  2. Nadine Chlaß, 2011. "On Individual Cursedness - How personality shapes individuals' sensitivity to incur a winner's curse -," Jena Economic Research Papers 2011-027, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.

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