Working Paper: CEPR ID: DP10340
Authors: Isabelle Brocas; Juan D. Carrillo; F. Javier Otamendi
Abstract: We conduct a laboratory experiment where groups of 4 subjects constrained to obtain at most one good each, sequentially bid for 3 goods in first and second price auctions. Subjects learn at the beginning of each auction their valuation for the good and exit the auction once they have obtained one good. We show that, contrary to equilibrium predictions, subjects? bidding behavior is excessively similar across units and across mechanisms at the aggregate level. We provide two (complementary) explanations for these departures. One is bounded rationality. Subjects do not fully comprehend subtle differences between mechanisms. The other is self-selection. Subjects are very heterogeneous and some of them deviate more from equilibrium than others. Since deviations take mostly the form of overbidding, these subjects win the first or second good and exit the auction, leaving those who play closer to theoretical predictions to bid for the third good. Support for this hypothesis comes from the documented higher bidding, lower efficiency and lower profits associated with the first and second unit compared to the third one.
Keywords: auctions; laboratory experiment
JEL Codes: C92; D44; D82
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tendency to overbid (D44) | lower efficiency (D61) |
| tendency to overbid (D44) | lower profits (D33) |
| bounded rationality (D01) | tendency to overbid (D44) |
| self-selection (C52) | tendency to overbid (D44) |
| self-selection (C52) | lower efficiency (D61) |
| self-selection (C52) | lower profits (D33) |
| waiting to bid (D44) | higher profits (D33) |