Auction Models Are Not Robust When Bidders Make Small Mistakes
September 1999 Economists are generally suspicious of equilibria that are not robust to small perturbations since Agents in real world problems may not be able to perfectly optimize. This research studies two forms of perturbations in a benchmark auction model where firms submit sealed bids to build a single and indivisible public project. First, firms will measure expected payoffs imperfectly and therefore optimize with a small error. Second, firms imperfectly implement their biding strategy, occasionally submitting incorrect bids. Some conclusions in applied work are shown to be extremely sensitive to these two types of perturbations. If the number of bidders is sufficiently large and if a firm cannot compute profit to several significant digits, the Braves-Nash equilibrium is shown not to be robust. If firms implement their bidding strategies with very small error or there is a positive probability that the econometrician misrecords an observed bid, the firms' markups cost will trend to be overestimated in empirical applications. This research proposes a simple model of decision making with error that can be used to alleviate these problems. -->
|Date of creation:||Sep 1999|
|Contact details of provider:|| Postal: Ralph Landau Economics Building, Stanford, CA 94305-6072|
Web page: http://www-econ.stanford.edu/econ/workp/
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:wop:stanec:00002. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Krichel)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.