FIRST‐PRICE COMMON VALUE AUCTIONS: BIDDER BEHAVIOR AND THE “WINNER'S CURSE”

Abstract

Experimental auction markets are characterized by a strong winner's curse in early auction periods as high bidders consistently lose money, failing to account for the adverse selection problem inherent in winning the auction. With experience and bankruptcy on the part of the worst offenders, subjects earn positive average profits, but these are far below Nash equilibrium predictions as a sizable minority of bids exceed the expected value of the item conditional on having the highest estimate of value. Individual bidding behavior is explored to identify the mechanism whereby market outcomes no longer display the worst effects of the winner's curse.