Opportunity cost, inattention and the bidder’s curse

David Freeman, Erik Kimbrough and J. Philipp Reiss

European Economic Review, 2020, vol. 129, issue C

Abstract: Auction winners sometimes suffer a “bidder’s curse”, paying more for an item at auction than the fixed price charged for an identical item by other sellers. This seemingly irrational behavior is puzzling because the information necessary to avoid overpaying would appear to be readily available to bidders, yet they seem to ignore it. To understand this behavior, we consider the bidders’ decisions whether to acquire information about the fixed price before bidding, in the presence of opportunity costs. Our theory introduces costly information acquisition into an auction model, with a fixed price aftermarket selling an identical good. When information about the fixed price is costly, bidders sometimes remain rationally ignorant and overbid in the auction, generating the bidder’s curse. To assess the empirical validity of our proposed explanation, we study the model’s predictions in an experiment where subjects have an opportunity cost of looking up a fixed price and bid in an auction. We find that information acquisition decreases and overbidding increases with opportunity cost as predicted. Most observed lookup behavior is rationalizable and rational ignorance reliably generates the bidder’s curse.

Keywords: Auctions; Bidder’S curse; Limited attention; Experiments; Rational ignorance (search for similar items in EconPapers)
JEL-codes: C72 C92 D44 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Opportunity cost, inattention and the bidder's curse (2017)
Working Paper: Opportunity cost, inattention and the bidder's curse (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:129:y:2020:i:c:s0014292120301744

DOI: 10.1016/j.euroecorev.2020.103543

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