Can Relaxation of Beliefs Rationalize the Winner’s Curse?: An Experimental Study

Asen Ivanov (), Dan Levin () and Muriel Niederle ()
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Asen Ivanov: Department of Economics, VCU School of Business

No 803, Working Papers from VCU School of Business, Department of Economics

Abstract: We use a second-price common-value auction, the maximal game, to experimentally study whether the Winner’s Curse (WC) can be explained by models which retain best-response behavior but allow for inconsistent beliefs. In the maximal game, the WC can be rationalized only by a belief that others use weakly-dominated strategies. Yet, we find that the WC is widespread. In addition, we create environments where, regardless of beliefs, there should be a correction of the WC. We find little evidence of such a correction. Overall, our study suggests that the WC, at least in initial periods of play in the laboratory, represents a more fundamental departure from NE than a mere inconsistency of beliefs.

Keywords: common-value auctions; winner’s curse; beliefs; cursed equilibrium; level-k model; quantal response equilibrium (search for similar items in EconPapers)
JEL-codes: C92 D44 D82 D83 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-exp
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: Can Relaxation of Beliefs Rationalize the Winner's Curse?: An Experimental Study (2010)
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