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Bidding in Common Value Auctions: How the Commercial Construction Industry Corrects for the Winner's Curse

  • Douglas Dyer

    (Dyerwolf Consulting, Crystal Beach, Texas 77650)

  • John H. Kagel

    (Department of Economics, University of Pittsburgh, Pittsburgh, Pennsylvania 15260)

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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File URL: http://dx.doi.org/10.1287/mnsc.42.10.1463
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Article provided by INFORMS in its journal Management Science.

Volume (Year): 42 (1996)
Issue (Month): 10 (October)
Pages: 1463-1475

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Handle: RePEc:inm:ormnsc:v:42:y:1996:i:10:p:1463-1475
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