Level-k Auctions: Can a Non-Equilibrium Model of Strategic Thinking Explain the Winner's Curse and Overbidding in Private-Value Auctions?

Vincent P. Crawford and Nagore Iriberri
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Nagore Iriberri: University of California, San Diego

No 2005-13, University of California at San Diego, Economics Working Paper Series from Department of Economics, UC San Diego

Abstract: This paper proposes a structural non-equilibrium model of initial responses to incomplete-information games based on "level-k" thinking, which describes behavior in many experiments with complete-information games. We derive the model's implications in first- and second-price auctions with general information structures, compare them to equilibrium and Eyster and Rabin's (2005) "cursed equilibrium," and evaluate the model's potential to explain behavior in auction experiments. The level-k model generalizes many insights from equilibrium auction theory. It also allows a unified explanation of the winner's curse in common-value auctions and overbidding in those independent-private-value auctions without the uniform value distributions used in most experiments.

Keywords: common-value auctions; winner's curse; overbidding; bounded rationality; level-k model; non-equilibrium strategic thinking; behavioral game theory; experiments (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-exp and nep-gth
Date: 2005-11-01
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Related works:
Working Paper: Level-k Auctions: Can a Non-Equilibrium Model of Strategic Thinking Explain the Winner's Curse and Overbidding in Private-Value Auctions? (2006)
Working Paper: Level-k Auctions: Can a Non-Equilibrium Model of Strategic Thinking Explain the Winner's Curse and Overbidding in Private-Value Auctions? (2007)
Working Paper: Level-k Auctions: Can a Non-Equilibrium Model of Strategic Thinking Explain the Winner's Curse and Overbidding in Private-Value Auctions? (2005)
Journal Article: Level-k Auctions: Can a Nonequilibrium Model of Strategic Thinking Explain the Winner's Curse and Overbidding in Private-Value Auctions? (2007)
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