The nature of information and its effect on bidding behavior: laboratory evidence in a common value auction

Juan D. Carrillo, Isabelle Brocas and Manuel Castro

No 7848, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study in the laboratory a series of first price sealed bid auctions of a common value good. Bidders face three types of information: private information, public information and common uncertainty. Auctions are characterized by the relative size of these three information components. According to Nash Equilibrium theory, bids can be decomposed into two additive parts. For the private information, bidders should shade their bid. For the common uncertainty and public information, bidders should compete a la Bertrand and bid the expected and realized values respectively. We find that departures from equilibrium predictions occur not only with respect to private information but with respect to public information and common uncertainty as well. A cluster analysis reveals that subjects exhibit heterogeneous behavior with respect to all three information components. An estimation of the Cognitive Hierarchy and Cursed Equilibrium models reveals that both models capture important aspects of the subjects behavior. However, the disparity of the estimated parameters as we vary the relative size of the three types of information suggests that their predictive power is limited.

Keywords: Common value auction; Laboratory experiment; Winner's curse (search for similar items in EconPapers)
JEL-codes: C92 D44 D82 (search for similar items in EconPapers)
Date: 2010-06
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Working Paper: The nature of information and its effect on bidding behavior: laboratory evidence in a common value auction (2011)
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