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Behavioral Efficiency II: A Simple Laboratory Demonstration

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Abstract

Laboratory experiments reporting on shortfalls from allocative efficiency of allocation mechanisms depend on the induced-values methodology, which cannot be extended to the field. Harstad [2011] proposes to observe efficiency of allocation mechanisms without knowing motivations via behavior in appropriately designed aftermarkets. This paper demonstrates the approach in a highly simplified economy: allocation of a single unit of an abstract commodity. In the context studied, second-price auctions are observed to yield significantly greater behavioral inefficiencies than first-price auctions, both in terms of frequency of behaviorally inefficient outcomes, and in terms of the expected size of gains from aftermarket trade missed by the auction itself. The design is shown to be field-ready.

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  • Ronald M. Harstad, 2011. "Behavioral Efficiency II: A Simple Laboratory Demonstration," Working Papers 1121, Department of Economics, University of Missouri.
    • Handle: RePEc:umc:wpaper:1121
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    1. Kagel, John H & Levin, Dan & Harstad, Ronald M, 1995. "Comparative Static Effects of Number of Bidders and Public Information on Behavior in Second-Price Common Value Auctions," International Journal of Game Theory, Springer;Game Theory Society, vol. 24(3), pages 293-319.
    2. Milgrom, Paul R & Weber, Robert J, 1982. "A Theory of Auctions and Competitive Bidding," Econometrica, Econometric Society, vol. 50(5), pages 1089-1122, September.
    3. Milgrom, Paul R, 1981. "Rational Expectations, Information Acquisition, and Competitive Bidding," Econometrica, Econometric Society, vol. 49(4), pages 921-943, June.
    4. 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.
    5. 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.
    6. Matthew Jackson, 2009. "Non-existence of equilibrium in Vickrey, second-price, and English auctions," Review of Economic Design, Springer;Society for Economic Design, vol. 13(1), pages 137-145, April.
    7. Ronald Harstad, 2000. "Dominant Strategy Adoption and Bidders' Experience with Pricing Rules," Experimental Economics, Springer;Economic Science Association, vol. 3(3), pages 261-280, December.
    8. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
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    1. Ronald M. Harstad, 2014. "Efficiency Measurement via Revealed Thresholds, Without Knowing Valuations," Working Papers 1405, Department of Economics, University of Missouri, revised 01 Mar 2016.

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    Keywords

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    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D46 - Microeconomics - - Market Structure, Pricing, and Design - - - Value Theory

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