Winner's Curse Corrections Magnify Adverse Selection

Ronald Harstad and Robert Bordley

No 907, Working Papers from Department of Economics, University of Missouri

Abstract: The adverse-selection literature has only considered the case in which competing sellers' costs of supply are independent and privately known by the individual sellers. In contrast, the auction literature has ignored adverse selection by implicitly assuming that a bid-taker is indifferent between suppliers at a given price. We show that competition in auctions with common-value elements serves to magnify the impact of adverse selection, as a bidder supplying a higher-cost product rationally makes a heightened winner's curse correction in a procurement auction. Hence lower-cost suppliers are disproportionately likely to win the auction, potentially creating a more serious quality problem for the procurer than mainstream adverse-selection models suggest.

Keywords: winner's curse; adverse selection; common-value auctions; procurement; product quality (search for similar items in EconPapers)
JEL-codes: C62 D44 D82 L14 (search for similar items in EconPapers)
Pages: 13 pgs.
Date: 2009-06-15
New Economics Papers: this item is included in nep-cta and nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:umc:wpaper:0907

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