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Common Value Auctions with Default: An Experimental Approach

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  • Matthew Roelofs

Abstract

This paper examines a common value auction in which bidder default is explicitly allowed. The lack of contractual enforcement has implications for the formation of bids as well as the revenue properties of the auction. Using a common value procurement auction, we explore these implications in an experimental setting. Our results show that bidders are more aggressive when default is allowed. A theoretical result shows that allowing default can actually be in the best interest of the auctioneer. Experimental evidence, however, indicates that this result does not hold true in practice. One possible reason for this discrepancy is that the data in our experiments is consistent with winner's curse behavior. Copyright Kluwer Academic Publishers 2002

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  • Matthew Roelofs, 2002. "Common Value Auctions with Default: An Experimental Approach," Experimental Economics, Springer;Economic Science Association, vol. 5(3), pages 233-252, December.
    • Handle: RePEc:kap:expeco:v:5:y:2002:i:3:p:233-252
    DOI: 10.1023/A:1020840420643
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    References listed on IDEAS

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    1. Hansen, Robert G & Lott, John R, Jr, 1991. "The Winner's Curse and Public Information in Common Value Auctions: Comment," American Economic Review, American Economic Association, vol. 81(1), pages 347-361, March.
    2. Zheng, Charles Z., 2001. "High Bids and Broke Winners," Journal of Economic Theory, Elsevier, vol. 100(1), pages 129-171, September.
    3. von Ungern-Sternberg, Thomas, 1991. "Swiss Auctions," Economica, London School of Economics and Political Science, vol. 58(231), pages 341-357, August.
    4. Waehrer Keith, 1995. "A Model of Auction Contracts with Liquidated Damages," Journal of Economic Theory, Elsevier, vol. 67(2), pages 531-555, December.
    5. Kagel, John H. & Levin, Dan, 1986. "The Winner's Curse and Public Information in Common Value Auctions," American Economic Review, American Economic Association, vol. 76(5), pages 894-920, December.
    6. John H. Kagel & Colin M. Campbell & Dan Levin, 1999. "The Winner's Curse and Public Information in Common Value Auctions: Reply," American Economic Review, American Economic Association, vol. 89(1), pages 325-334, March.
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    Cited by:

    1. Herweg, Fabian & Schwarz, Marco A., 2016. "Optimal Cost Overruns: Procurement Auctions and Renegotiation," CEPR Discussion Papers 11179, C.E.P.R. Discussion Papers.
    2. Pagnozzi, Marco & Saral, Krista J., 2019. "Auctions with limited liability through default or resale," Journal of Economic Behavior & Organization, Elsevier, vol. 159(C), pages 51-74.
    3. Fabian Herweg & Marco A. Schwarz, 2018. "Optimal Cost Overruns: Procurement Auctions With Renegotiation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 59(4), pages 1995-2021, November.
    4. Wei-Shiun Chang & Timothy C. Salmon & Krista J. Saral, 2016. "Procurement Auctions With Renegotiation And Wealth Constraints," Economic Inquiry, Western Economic Association International, vol. 54(3), pages 1684-1704, July.
    5. Kris De Jaegher & Michal Soltes & Vitezslav Titl, 2023. "Easing Renegotiation Rules in Public Procurement: Evidence from a Policy Reform," CERGE-EI Working Papers wp757, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    6. Sander Onderstal & Ailko van der Veen, 2011. "Keeping out Trojan Horses: Auctions and Bankruptcy in the Laboratory," Tinbergen Institute Discussion Papers 11-024/1, Tinbergen Institute.
    7. Lorentziadis, Panos L., 2014. "Bidding under auctioneer default risk," Omega, Elsevier, vol. 49(C), pages 123-133.

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