Overbidding and matching rules in second-price auctions: An experimental study

This paper examines how matching conditions – stranger, partner, and group – in the second-price auction (SPA) affect the extent to which spite contributes to overbidding. In my theoretical framework, bidders experience negative spillovers from rivals’ payoffs and also a joy-of-winning (JOW). I derive maximum likelihood estimates of the spite and JOW parameters using 80% of the data, and find that the weights assigned to rivals’ payoffs in subjects’ utility functions are 8% and 15% in partner and group treatments respectively. Next, I evaluate the fits of the pure spite, pure JOW, and the combined models in the estimation and prediction sample, i.e., in the remaining 20% of subjects. Consistent with the estimation results, the goodness-of-fit statistics suggest that spite is more important in driving overbidding when bidders are matched against each other repeatedly. Further, I show that overbidding increases more in the partner treatment relative to the stranger treatment in the middle rounds of auctions. Finally, by eliciting subjects’ willingness-to-pay to harm others, I am able to link negative other-regarding preferences to overbidding and estimates of spitefulness in the SPA. This affirms the hypothesis that social motivation influences bidding behaviour in auctions with repeated interactions.