Bidding with money or action plans? Asset allocation under strategic uncertainty

Katerina Sherstyuk, Nina Karmanskaya and Pavel Teslia
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Nina Karmanskaya: Novosibirsk State Technical University
Pavel Teslia: Novosibirsk State Technical University

No 201603, Working Papers from University of Hawaii at Manoa, Department of Economics

Abstract: We study, theoretically and experimentally, alternative mechanisms to allocate assets when the future value of the asset is unknown at the time of allocation because of strategic uncertainty. We compare auctions, or bidding with money, for the right to play the minimum effort coordination game, with bidding with action (effort) proposals, where bidders with the highest proposed actions are selected as winners. Provided that the bidders commit to their proposals, bidding with action proposals eliminates strategic uncertainly and is characterized by the unique fully efficient Nash equilibrium. Allowing to revise action proposals after the assets are allocated admits both informative fully efficient, and uninformative babbling equilibria. In the experiment, bidding with action proposals with commitment consistently leads to the efficient outcome, whereas without commitment, both fully efficient and inefficient outcomes are observed. Auctioning off the right to play leads to higher actions than under random allocation, but is characterized by significant overbidding and winner losses. We further experimentally compare the mechanisms in their ability to train the players to achieve and sustain efficient coordination even after the allocation mechanism changes.

Keywords: economic experiments; minimum effort coordination game; selection mechanisms (search for similar items in EconPapers)
JEL-codes: C72 C90 (search for similar items in EconPapers)
Date: 2016-02
New Economics Papers: this item is included in nep-exp, nep-gth and nep-hpe
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