Working Paper: CEPR ID: DP6476
Authors: Andreas Roider; Patrick W. Schmitz
Abstract: The experimental literature has documented that there is overbidding in second-price auctions, regardless of bidders' valuations. In contrast, in first-price auctions there tends to be overbidding for large valuations, but underbidding for small valuations. We show that the experimental evidence can be explained by a simple extension of the standard auction model, where bidders anticipate positive or negative emotions caused by the mere fact of winning or losing. Even if the "emotional" (dis-)utility is very small, the seller's optimal reserve price r* may be significantly different from the standard model. Moreover, r* is decreasing in the number of bidders.
Keywords: auction theory; emotions; reserve prices
JEL Codes: D44; D81; D82
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Anticipated joy (Y60) | Bids (D44) |
| Anticipated anger (D84) | Participation in first-price auctions (D44) |
| Number of bidders (D44) | Optimal reserve price (D44) |