The overbidding-myth and the underbidding-bias in first-price auctions

Kirchkamp, Oliver ; Reiß, J. Philipp

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URN: urn:nbn:de:bsz:180-madoc-27102
Document Type: Working paper
Year of publication: 2004
The title of a journal, publication series: None
Publication language: English
Institution: School of Law and Economics > Sonstige - Fakultät für Rechtswissenschaft und Volkswirtschaftslehre
MADOC publication series: Sonderforschungsbereich 504 > Rationalitätskonzepte, Entscheidungsverhalten und ökonomische Modellierung (Laufzeit 1997 - 2008)
Subject: 330 Economics
Classification: JEL: D44 C92 ,
Subject headings (SWD): Auktionstheorie , Risikoverhalten
Keywords (English): Auction , Experiment , Overbidding , Underbidding , Risk-Aversion
Abstract: First-price auction experiments find often substantial overbidding which is typically related to risk aversion. We introduce a model where some bidders use simple linear bids. As with risk aversion this leads to overbidding if valuations are high, but in contrast to risk aversion the model predicts underbidding if valuations are low. We test this model with the help of experiments, compare bidding in first-price and second-price auctions and study revenue under different treatments. We conclude that at least part of the commonly observed overbidding is an artefact of experimental setups which rule out underbidding. Simple linear bids seem to fit observations better.
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