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Quantal Response Equilibrium and Overbidding in Private-Value Auctions

  • Jacob K. Goeree


  • Charles A. Holt


  • Thomas R. Palfrey

This paper reports the results of a private-values auction experiment in which expected costs of deviating from the Nash equilibrium bidding function are asymmetric, with the implication that upward deviations will be more likely in one treatment than in the other. Overbidding is observed in both treatments, but is more prevalent in the treatment where the costs of overbidding are lower. We specify and estimate a noisy (quantal response) model of equilibrium behavior. Estimated noise and risk aversion parameters are highly significant and consistent across treatments. The resulting two-parameter model tracks both the average bids and the distribution of bids remarkably well. Alternative explanations of overbidding are also considered. The estimates of parameters from a nonlinear probability weighting function yield a formulation that is essentially equivalent to risk aversion in this context. A model in which players experience a "joy of winning" provides a reasonable fit of the data but does significantly worse than the risk aversion model.

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Paper provided by University of Virginia, Department of Economics in its series Virginia Economics Online Papers with number 345.

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Length: 29 pages
Date of creation: Mar 2000
Date of revision:
Handle: RePEc:vir:virpap:345
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  13. 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.
  14. Jacob K. Goeree & Charles A. Holt, 2000. "A Model of Noisy Introspection," Virginia Economics Online Papers 343, University of Virginia, Department of Economics.
  15. Smith, Vernon L & Walker, James M, 1993. "Rewards, Experience and Decision Costs in First Price Auctions," Economic Inquiry, Western Economic Association International, vol. 31(2), pages 237-45, April.
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  18. Kagel, John H & Roth, Alvin E, 1992. "Theory and Misbehavior in First-Price Auctions: Comment," American Economic Review, American Economic Association, vol. 82(5), pages 1379-91, December.
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