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Are Structural Estimates of Auction Models Reasonable? Evidence from Experimental Data

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Patrick Bajari
Ali Hortacsu

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Abstract

February 2003

Recently, economists have developed methods for structural estimation of auction models. Many researchers object to these methods because they find the rationality assumptions used in these models to be implausible. In this paper, we explore whether structural auction models can generate reasonable estimates of bidders’ private information. Using bid data from auction experiments, we estimate four alternative structural models of bidding in first-price sealed-bid auctions: 1) risk neutral Bayes-Nash, 2) risk averse Bayes-Nash, 3) a model of learning and 4) a quantal response model of bidding. For each model, we compare the estimated valuations and the valuations assigned to bidders in the experiments. We find that a slight modification of Guerre, Perrigne and Vuong’s (2000) procedure for estimating the risk neutral Bayes-Nash model to allow for bidder asymmetries generates quite reasonable estimates of the structural parameters.

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Paper provided by Stanford University, Department of Economics in its series Working Papers with number 03002.

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Date of creation: Feb 2003
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Handle: RePEc:wop:stanec:03002

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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. Emmanuel Guerre & Isabelle Perrigne & Quang Vuong, 2000. "Optimal Nonparametric Estimation of First-Price Auctions," Econometrica, Econometric Society, vol. 68(3), pages 525-574, May.
  2. Charles A. Holt & Jacob K. Goeree, 1999. "Stochastic Game Theory: For Playing Games, Not Just for Doing Theory," Virginia Economics Online Papers 306, University of Virginia, Department of Economics. [Downloadable!]
  3. Laffont, Jean-Jacques & Ossard, Herve & Vuong, Quang, 1995. "Econometrics of First-Price Auctions," Econometrica, Econometric Society, vol. 63(4), pages 953-80, July. [Downloadable!] (restricted)
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  4. C. Monica Capra & Jacob K. Goeree & Rosario Gomez & Charles A. Holt, 2000. "Learning and Noisy Equilibrium Behavior in an Experimental Study of Imperfect Price Competition," Virginia Economics Online Papers 336, University of Virginia, Department of Economics. [Downloadable!]
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  5. ELYAKIME, Bernard & LAFFONT, Jean-Jacques & LOISEL, Patrice & VUONG, Quang, 1993. "First-Price Sealed-Bid Auctions with Secret Reservation Prices," IDEI Working Papers 27, Institut d'Économie Industrielle (IDEI), Toulouse.
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  6. repec:cup:etheor:v:12:y:1996:i:3:p:517-67 is not listed on IDEAS
  7. 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)
  8. Laffont, Jean-Jacques & Vuong, Quang, 1996. "Structural Analysis of Auction Data," American Economic Review, American Economic Association, vol. 86(2), pages 414-20, May. [Downloadable!] (restricted)
  9. 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)
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  10. 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. [Downloadable!] (restricted)
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  11. Maskin, Eric & Riley, John, 2000. "Equilibrium in Sealed High Bid Auctions," Review of Economic Studies, Blackwell Publishing, vol. 67(3), pages 439-54, July.
  12. Maskin, Eric & Riley, John, 2000. "Asymmetric Auctions," Review of Economic Studies, Blackwell Publishing, vol. 67(3), pages 413-38, July.
  13. Cox, James C. & Smith, Vernon L. & Walker, James M., 1983. "A test that discriminates between two models of the Dutch-first auction non-isomorphism," Journal of Economic Behavior & Organization, Elsevier, vol. 4(2-3), pages 205-219. [Downloadable!] (restricted)
  14. Jofre-Bonet, Mireia & Pesendorfer, Martin, 2000. "Bidding behavior in a repeated procurement auction: A summary," European Economic Review, Elsevier, vol. 44(4-6), pages 1006-1020, May. [Downloadable!] (restricted)
  15. Marcet, Albert & Sargent, Thomas J, 1989. "Convergence of Least-Squares Learning in Environments with Hidden State Variables and Private Information," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1306-22, December. [Downloadable!] (restricted)
  16. Donald, Stephen G. & Paarsch, Harry J., 1996. "Identification, Estimation, and Testing in Parametric Empirical Models of Auctions within the Independent Private Values Paradigm," Econometric Theory, Cambridge University Press, vol. 12(03), pages 517-567, August. [Downloadable!]
  17. McKelvey Richard D. & Palfrey Thomas R., 1995. "Quantal Response Equilibria for Normal Form Games," Games and Economic Behavior, Elsevier, vol. 10(1), pages 6-38, July. [Downloadable!] (restricted)
  18. Marcet, Albert & Sargent, Thomas J., 1989. "Convergence of least squares learning mechanisms in self-referential linear stochastic models," Journal of Economic Theory, Elsevier, vol. 48(2), pages 337-368, August. [Downloadable!] (restricted)
  19. 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)
  20. Cox, James C. & Smith, Vernon L. & Walker, James M., 1983. "Tests of a heterogeneous bidders theory of first price auctions," Economics Letters, Elsevier, vol. 12(3-4), pages 207-212. [Downloadable!] (restricted)
  21. 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.
  22. 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)
  23. Donald, S.G. & Paarsch, H.J., 1993. "Identification, Estimation, and Testing in Empirical Models of Auction Within the Independent Private Values Paradigm," UWO Department of Economics Working Papers 9319, University of Western Ontario, Department of Economics.
  24. Kenneth Hendricks & Joris Pinkse & Robert H. Porter, 2003. "Empirical Implications of Equilibrium Bidding in First--Price, Symmetric, Common Value Auctions," Review of Economic Studies, Blackwell Publishing, vol. 70(1), pages 115-145, January.
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  25. Thomas Palfrey, 2002. "Quantal Response Equilibrium and Overbidding in Private Value Auctions," Theory workshop papers 357966000000000089, UCLA Department of Economics. [Downloadable!]
  26. 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)
  27. 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)
  28. Milgrom, Paul R & Weber, Robert J, 1982. "A Theory of Auctions and Competitive Bidding," Econometrica, Econometric Society, vol. 50(5), pages 1089-1122, September. [Downloadable!] (restricted)
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  29. 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)
  30. Donald, Stephen G & Paarsch, Harry J, 1993. "Piecewise Pseudo-maximum Likelihood Estimation in Empirical Models of Auctions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(1), pages 121-48, February. [Downloadable!] (restricted)
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(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. Harry J. Paarsch & Jacques Robert, 2003. "Testing Equilibrium Behaviour At First-Price, Sealed-Bid Auctions With Discrete Bid Increments," CIRANO Working Papers 2003s-32, CIRANO. [Downloadable!]
  2. Philip A. Haile & Ali Hortacsu & Grigory Kosenok, 0820. "On the Empirical Content of Quantal Response Equilibrium," Cowles Foundation Discussion Papers 1432R, Cowles Foundation, Yale University, revised Jun 0820. [Downloadable!]
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  3. Tostao, Emilio & Chung, Chanjin & Brorsen, B. Wade, 2006. "Integrating the Structural Auction Approach and Traditional Measures of Market Power," 2006 Annual meeting, July 23-26, Long Beach, CA 21244, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
  4. Patrick Bajari & Stephanie Houghton & Steven Tadelis, 2004. "Bidding for Incompete Contracts," Working Papers 2004.141, Fondazione Eni Enrico Mattei. [Downloadable!]
  5. Lu, Jingfeng & Perrigne, Isabelle, 2006. "Estimating risk aversion from ascending and sealed-bid auctions: the case of timber auction data," MPRA Paper 948, University Library of Munich, Germany. [Downloadable!]
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