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Endogenous Entry and Self-selection in Private Value Auctions: An Experimental Study

  • Palfrey, Thomas R.
  • Pevnitskaya, Svetlana

This paper presents the results of an experimental study of endogenous entry and bidding behavior in first-price independent private value auctions. In the first stage N potential bidders simultaneously decide whether to participate in an auction or to claim a fixed outside option. At this stage all potential bidders know N, the distribution of possible values, and the value of the outside option. In the second stage, each entering bidder submits a bid after learning their own private value for the object and the number of entering bidders. We find evidence of self-selection effect, as predicted by an equilibrium model of heterogeneous risk averse bidders. The theoretical model predicts that bidding in the auction will be lower with endogenous entry because only the less risk averse bidders will choose to enter. We also find that entry decreases with the value of the outside option, as predicted. One surprising finding is that we observe over-entry relative to the theoretical predictions.

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Paper provided by California Institute of Technology, Division of the Humanities and Social Sciences in its series Working Papers with number 1172.

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Length: 33 pages
Date of creation: Aug 2003
Date of revision:
Publication status: Published:
Handle: RePEc:clt:sswopa:1172
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  1. Levin, Dan & Smith, James L, 1994. "Equilibrium in Auctions with Entry," American Economic Review, American Economic Association, vol. 84(3), pages 585-99, June.
  2. Kirchkamp, Oliver & Poen, Eva & Reiß, J. Philipp, 2004. "Bidding with outside options," Papers 04-21, Sonderforschungsbreich 504.
  3. Palfrey, Thomas R. & Goeree, Jacob & Holt, Charles, 2000. "Quantal Response Equilibrium and Overbidding in Private-value Auctions," Working Papers 1073, California Institute of Technology, Division of the Humanities and Social Sciences.
  4. Svetlana Pevnitskaya, 2003. "Endogenous Entry in First-Price Private Value Auctions: the Self-Selection Effect," Working Papers 03-03, Ohio State University, Department of Economics.
  5. Fey, Mark & McKelvey, Richard D & Palfrey, Thomas R, 1996. "An Experimental Study of Constant-Sum Centipede Games," International Journal of Game Theory, Springer;Game Theory Society, vol. 25(3), pages 269-87.
  6. Morgan John & Steiglitz Ken & Reis George, 2003. "The Spite Motive and Equilibrium Behavior in Auctions," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 2(1), pages 1-27, April.
  7. 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.
  8. Thomas Palfrey, 2002. "Quantal Response Equilibrium and Overbidding in Private Value Auctions," Theory workshop papers 357966000000000089, UCLA Department of Economics.
  9. 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.
  10. James Cox & Sam Dinkin & James Swarthout, 2001. "Endogenous Entry and Exit in Common Value Auctions," Experimental Economics, Springer;Economic Science Association, vol. 4(2), pages 163-181, October.
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