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English versus Vickrey auctions with loss averse bidders

Jonas von Wangenheim

No 2019/1, Discussion Papers from Free University Berlin, School of Business & Economics

Abstract: Evidence suggests that people evaluate outcomes relative to expectations. I analyze this expectation-based loss aversion (Köszegi and Rabin (2006, 2009)) in the context of dynamic and static auctions, where the reference point is given by the (endogenous) equilibrium outcome. If agents update their reference point during the auction, the arrival of information crucially affects equilibrium behavior. Consequently, I show that - even with independent private values - the Vickrey auction yields strictly higher revenue than the English auction, violating the well known revenue equivalence. Thus, dynamic loss aversion offers a novel explanation for empirically observed differences between these auction formats.

Keywords: Vickrey auction; English auction; expectation-based loss aversion; revenue equivalence; dynamic loss aversion; personal equilibrium (search for similar items in EconPapers)
JEL-codes: D03 D44 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-des, nep-gth, nep-mic and nep-upt
Date: 2019
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