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Projection of Private Values in Auctions

Tristan Gagnon-Bartsch (), Marco Pagnozzi () and Antonio Rosato
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Tristan Gagnon-Bartsch: Harvard University

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: We explore how taste projection – the tendency to overestimate how similar others’ tastes are to one’s own – affects bidding in auctions. Taste-projecting bidders underestimate the dispersion in valuations and exaggerate the intensity of competition. Consequently, they overbid in firstprice auctions – irrespective of whether values are independent, correlated, or (a)symmetrically distributed – but not in second-price auctions. Hence, first-price auctions raise more revenue. Moreover, the optimal reserve price in first-price auctions is lower than the rational benchmark, and decreasing in the extent of projection and the number of bidders. With an uncertain common-value component, projecting bidders draw distorted inferences about others’ information. This misinference is stronger in second-price and English auctions, reducing their allocative efficiency compared to first-price auctions.

Keywords: Auctions; Projection Bias; False-Consensus Effect; Overbidding. (search for similar items in EconPapers)
JEL-codes: D03 D44 D82 D83 (search for similar items in EconPapers)
Date: 2020-06-24
New Economics Papers: this item is included in nep-des, nep-exp, nep-gth and nep-mic
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