Can Relaxation of Beliefs Rationalize the Winner's Curse?: An Experimental Study

Econometrica (Impact Factor: 3.5). 01/2010; 78(4):1435-1452. DOI: 10.2307/40928444
Source: RePEc

ABSTRACT We use a second-price common-value auction, called the maximal game, to experimentally study whether the winner's curse (WC) can be explained by models which retain best-response behavior but allow for inconsistent beliefs. We compare behavior in a regular version of the maximal game, where the WC can be explained by inconsistent beliefs, to behavior in versions where such explanations are less plausible. We find little evidence of differences in behavior. Overall, our study casts a serious doubt on theories that posit the WC is driven by beliefs. Copyright 2010 The Econometric Society.

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