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Bidding in common value fair division games: The winner's curse or even worse?

Author

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  • Alice Becker

    () (Max Planck Institute for Economics, Jena)

  • Tobias Brünner

    () (Goethe University Frankfurt)

Abstract

A unique indivisible commodity with an unknown common value is owned by group of individuals and should be allocated to one of them while compensating the others monetarily. We study the so-called fair division game (Güth, Ivanova-Stenzel, Königstein, and Strobel (2002, 2005)) theoretically and experimentally for the common value case and compare our results to the corresponding common value auction. Whereas symmetric risk neutral Nash equilibria are rather similar for both games, behavior differs strikingly. Implementing auctions and fair division games in the lab in a repeated setting under first- and second-price rule, we find that overall behavior is much more dispersed for the fair division games than for the auctions. Winners' profit margins and shading rates are on average slightly lower for the fair division game. Moreover, we find that behavior in the fair division game separates into extreme over- and underbidding.

Suggested Citation

  • Alice Becker & Tobias Brünner, 2009. "Bidding in common value fair division games: The winner's curse or even worse?," Jena Economic Research Papers 2009-090, Friedrich-Schiller-University Jena.
  • Handle: RePEc:jrp:jrpwrp:2009-090
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    File URL: http://www.wiwi.uni-jena.de/Papers/jerp2009/wp_2009_090.pdf
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    Keywords

    common value auction; winner's curse; fair division game;

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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