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Theory and Individual Behavior of First-Price Auctions

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  • Cox, James C
  • Smith, Vernon L
  • Walker, James M

Abstract

First-price auction theory is extended to the case of heterogeneous bidders characterized by M-parameter log-concave utility functions. This model, and its specific two-parameter constant relative risk averse special case, is generally supported by the results of 47 experiments. The one-parameter special case that comprises most of the theoretical literature is not supported by the experiments. One anomaly for the two-parameter model is that too many of the subjects exhibit positive (or negative) intercepts in their linear estimated bid functions. Accordingly, we develop a specific three-parameter model, which introduces a utility of winning, and a threshold utility of surplus. The new model, tested directly by introducing lump-sum payments or charges for winning, is not falsified by the new experiments. Copyright 1988 by Kluwer Academic Publishers

Suggested Citation

  • 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.
  • Handle: RePEc:kap:jrisku:v:1:y:1988:i:1:p:61-99
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