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Loss aversion and sunk cost sensitivity in all-pay auctions for charity: Theory and experiments

Joshua Foster

Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), 2020, vol. 84, issue C

Abstract: This paper theoretically and experimentally studies the role of two behavioral biases in all-pay auctions for charity. The theory is developed to predict the effect of loss aversion in the first-price all-pay auction and sunk cost sensitivity in the war of attrition. Using controlled laboratory experiments, auction treatments are designed to test for the presence of these biases. In support of the theory, the results indicate that revenues in incremental bidding mechanisms such as the war of attrition rely on bidders who are sunk cost sensitive. It is shown that this behavioral response can be curbed significantly with a commitment device. Likewise, the results of the experimental first-price all-pay auctions find evidence of loss aversion, which reduces bidders’ average bid. These findings help explain the inconsistencies in revenues from previous all-pay auction studies and indicate a mechanism preference based on the distribution of these behavioral characteristics.

Keywords: Auctions; Market design; Charitable giving (search for similar items in EconPapers)
JEL-codes: C92 D03 D44 D64 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:soceco:v:84:y:2020:i:c:s2214804319301831

DOI: 10.1016/j.socec.2019.101486

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Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics) is currently edited by Ofer Azar

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