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Investment Incentives in Auctions: An Experiment

  • Veronika Grimm
  • Friederike Mengel
  • Giovanni Ponti
  • Lari Arthur Viianto

We experimentally analyze first and second price auctions where one bidder can achieve a comparative advantage by investment prior to the auction. We find that, as predicted by theory, bidders invest more often prior to second price auctions than prior to first price auctions. In both auction formats bidding is more aggressive than the equilibrium prediction. However, bidding is closer to equilibrium than in control treatments where the comparative advantage is exogenous.

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Paper provided by University of Cologne, Department of Economics in its series Working Paper Series in Economics with number 26.

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Date of creation: 06 Jun 2006
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Handle: RePEc:kls:series:0026
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  1. Veronika Grimm, 2006. "Sequential versus Bundle Auctions for Recurring Procurement," Working Paper Series in Economics 27, University of Cologne, Department of Economics.
  2. Schotter, Andrew & Weiss, Avi & Zapater, Inigo, 1996. "Fairness and survival in ultimatum and dictatorship games," Journal of Economic Behavior & Organization, Elsevier, vol. 31(1), pages 37-56, October.
  3. Piccione, Michele & Tan, Guofu, 1996. "Cost-Reducing Investment, Optimal Procurement and Implementation by Auctions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(3), pages 663-85, August.
  4. Dakshina G. De Silva & Timothy Dunne & Georgia Kosmopoulou, 2003. "An Empirical Analysis of Entrant and Incumbent Bidding in Road Construction Auctions," Journal of Industrial Economics, Wiley Blackwell, vol. 51(3), pages 295-316, 09.
  5. Binmore,K. & McCarthy,J. & Ponti,G. & ..., 1999. "A backward induction experiment," Working papers 34, Wisconsin Madison - Social Systems.
  6. Maskin, Eric & Riley, John, 2000. "Asymmetric Auctions," Review of Economic Studies, Wiley Blackwell, vol. 67(3), pages 413-38, July.
  7. Hoffman Elizabeth & McCabe Kevin & Shachat Keith & Smith Vernon, 1994. "Preferences, Property Rights, and Anonymity in Bargaining Games," Games and Economic Behavior, Elsevier, vol. 7(3), pages 346-380, November.
  8. Güth, Werner & Ivanova-Stenzel, Radosveta & Wolfstetter, Elmar, 2001. "Bidding behavior in asymmetric auctions: An experimental study," SFB 373 Discussion Papers 2001,15, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
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