Quantal Response Equilibrium and Overbidding in Private-Value Auctions

Jacob Goeree, Charles Holt and Thomas Palfrey

Virginia Economics Online Papers from University of Virginia, Department of Economics

Abstract: This paper reports the results of a private-values auction experiment in which expected costs of deviating from the Nash equilibrium bidding function are asymmetric, with the implication that upward deviations will be more likely in one treatment than in the other. Overbidding is observed in both treatments, but is more prevalent in the treatment where the costs of overbidding are lower. We specify and estimate a noisy (quantal response) model of equilibrium behavior. Estimated noise and risk aversion parameters are highly significant and consistent across treatments. The resulting two-parameter model tracks both the average bids and the distribution of bids remarkably well. Alternative explanations of overbidding are also considered. The estimates of parameters from a nonlinear probability weighting function yield a formulation that is essentially equivalent to risk aversion in this context. A model in which players experience a "joy of winning" provides a reasonable fit of the data but does significantly worse than the risk aversion model.

Pages: 29 pages
Date: 2000-03
New Economics Papers: this item is included in nep-exp
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Citations: View citations in EconPapers (17)

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http://repec.as.virginia.edu/RePEc/vir/virpap/papers/virpap345.pdf (application/pdf)

Related works:
Journal Article: Quantal Response Equilibrium and Overbidding in Private-Value Auctions (2002)
Working Paper: Quantal Response Equilibrium and Overbidding in Private Value Auctions (2002)
Working Paper: Quantal Response Equilibrium and Overbidding in Private-value Auctions (2000)
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Persistent link: https://EconPapers.repec.org/RePEc:vir:virpap:345

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