Working Paper: CEPR ID: DP7848
Authors: Isabelle Brocas; Juan D. Carrillo; Manuel Castro
Abstract: We study in the laboratory a series of first price sealed bid auctions of a common value good. Bidders face three types of information: private information, public information and common uncertainty. Auctions are characterized by the relative size of these three information components. According to Nash Equilibrium theory, bids can be decomposed into two additive parts. For the private information, bidders should shade their bid. For the common uncertainty and public information, bidders should compete a la Bertrand and bid the expected and realized values respectively. We find that departures from equilibrium predictions occur not only with respect to private information but with respect to public information and common uncertainty as well. A cluster analysis reveals that subjects exhibit heterogeneous behavior with respect to all three information components. An estimation of the Cognitive Hierarchy and Cursed Equilibrium models reveals that both models capture important aspects of the subjects behavior. However, the disparity of the estimated parameters as we vary the relative size of the three types of information suggests that their predictive power is limited.
Keywords: common value auction; laboratory experiment; winner's curse
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 |
|---|---|
| public information (L39) | bidding behavior (D44) |
| common uncertainty (D80) | bidding behavior (D44) |
| private information (D82) | bidding behavior (D44) |
| low realizations of public information (D80) | overbidding (D44) |
| high realizations of public information (D83) | underbidding (D44) |
| small amount of information (D89) | underestimate common uncertainty (D80) |
| cognitive hierarchy model (D91) | average bid behavior (D44) |
| treatment of information (D83) | bidding behavior (D44) |
| information structures (L10) | estimated parameters (C51) |