The Nature of Information and its Effect on Bidding Behavior: Laboratory Evidence in a Common Value Auction

43 Pages Posted: 19 Jul 2010

See all articles by Isabelle Brocas

Isabelle Brocas

University of Southern California - Department of Economics

Juan D. Carrillo

University of Southern California - Department of Economics; Centre for Economic Policy Research (CEPR)

Manuel Castro

University of Southern California

Date Written: June 2010

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 Classification: C92, D44, D82

Suggested Citation

Brocas, Isabelle and Carrillo, Juan D. and Castro, Manuel, The Nature of Information and its Effect on Bidding Behavior: Laboratory Evidence in a Common Value Auction (June 2010). CEPR Discussion Paper No. DP7848, Available at SSRN: https://ssrn.com/abstract=1640370

Isabelle Brocas (Contact Author)

University of Southern California - Department of Economics ( email )

3022 S. Vermont Ave
Los Angeles, CA 90089
United States
213-740-8842 (Phone)
213-740-8543 (Fax)

HOME PAGE: http://www-rcf.usc.edu/~brocas/

Juan D. Carrillo

University of Southern California - Department of Economics ( email )

3022 S. Vermont Ave.
Los Angeles, CA 90089
United States
213-740-3526 (Phone)
213-740-8543 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Manuel Castro

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
2
Abstract Views
808
PlumX Metrics