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Another Explanation for Overbidding and another Bias for Underbidding in First-Price Auctions
Abstract
Corruption in the public sector erodes tax compliance and leads to higher tax evasion. Moreover, corrupt public officials abuse their public power to extort bribes from the private agents. In both types of interaction with the public sector, the private agents are bound to face uncertainty with respect to their disposable incomes. To analyse effects of this uncertainty, a stochastic dynamic growth model with the public sector is examined. It is shown that deterministic excessive red tape and corruption deteriorate the growth potential through income redistribution and public sector inefficiencies. Most importantly, it is demonstrated that the increase in corruption via higher uncertainty exerts adverse effects on capital accumulation, thus leading to lower growth rates.
... So measurement of both is quite important in practice. Although the literature has focused mainly on overbidding there is a growing body on underbidding behaviour, see Ivanova-Stenzel and Sonsino (2004), Kirchkamp and Reiss (2006), and Roider and Schmitz (2007). This paper draws heavily on the results of Ferona (2010). ...
This paper provides a link between the structural approach of econometrics of auctions with the stochastic frontier literature in an effort to model excess bidding behaviour. The new technique is applied to timber auction data. The results suggest that both systematic overbidding and underbidding components are important.
We analyze if and when symmetric Bayes Nash equilibrium predictions can explain human bidding behavior in multi-object auctions. We focus on two sealed-bid split-award auctions with ex-ante split decisions as they can be regularly found in procurement practice. These auction formats are straightforward multi-object extensions of the first-price sealed-bid auction. We derive the risk-neutral symmetric Bayes Nash equilibrium strategies and find that, although the two auction mechanisms yield the same expected costs to the buyer, other aspects of the two models, including the equilibrium bidding strategies, differ significantly. The strategic considerations in these auction formats are more involved than in single-lot first-price sealed-bid auctions, and it is questionable whether expected utility maximization can explain human bidding behavior in such multi-object auctions. Therefore, we analyzed the predictive accuracy of our equilibrium strategies in the lab. In human subject experiments we found underbidding, which is in line with earlier experiments on single-lot first-price sealed-bid auctions. In order to control for regret we organize experiments against computerized bidders, who play the equilibrium strategy. In computerized experiments where bid functions are only used in a single auction, we found significant underbidding on low-cost draws. In experiments where the bid function is reused in 100 auctions, we could also control effectively for risk aversion, and there is no significant difference of the average bidding behavior and the risk-neutral Bayes Nash equilibrium bid function. The results suggest that strategic complexity does not serve as an explanation for underbidding in split-award procurement auctions, but risk aversion does have a significant impact.This article is protected by copyright. All rights reserved.
We report on sealed-bid second-price auctions that we conducted on the Internet using subjects with substantial prior experience: they were highly experienced participants in eBay auctions. Unlike the novice bidders in previous (laboratory) experiments, the experienced bidders exhibited no greater tendency to overbid than to underbid. However, even subjects with substantial prior experience tended not to bid their values, suggesting that the non-optimal bidding of novice subjects is robust to substantial experience in non-experimental auctions. We found that auction revenue was not significantly different from the expected revenue the auction would generate if bidders bid their values. Auction efficiency, as measured by the percentage of surplus captured, was substantially lower in our SPAs than in previous laboratory experiments.
The paper focuses on a comparative investigation of the standard one-bid first-price auction and a corresponding two-bid auction where each buyer may place two bids: a high-bid and a low one and the winner pays his low-bid if this was higher than all other bids. We characterize the equilibria of the two mechanisms and prove some results on the ranking of revenues for the symmetric case. We show that subjects in an experiment prefer the two-bid over the one-bid auction when given the possibility of choosing between the two and compare the observed behavior to the theoretical predictions.
First-price auction theory is extended to the case of heterogeneous bidders characterized by M-parameter log-concave utility functions. This model, and its specific two-parameter constant relative risk averse special case, is generally supported by the results of 47 experiments. The one-parameter special case that comprises most of the theoretical literature is not supported by the experiments. One anomaly for the two-parameter model is that too many of the subjects exhibit positive (or negative) intercepts in their linear estimated bid functions. Accordingly, we develop a specific three-parameter model, which introduces a utility of winning, and a threshold utility of surplus. The new model, tested directly by introducing lump-sum payments or charges for winning, is not falsified by the new experiments. Copyright 1988 by Kluwer Academic Publishers
The symmetric equilibrium of third-price auctions is characterized. It makes a number of contrasting predictions relative to firms and second-price auctions: bids exceed private values, the marginal effects on bids of an increase in private values is greater than one, increasing numbers of bidders reduces bids, and risk aversion requires bidding below the risk neutral Nash equilibrium. In the experiment, bidders do not always satisfy the point predictions of the theory. However, the game theoretic models correctly anticipate, at least directionally, the important effects of the price rule changes. Copyright 1993 by Royal Economic Society.
Corruption in the public sector erodes tax compliance and leads to higher tax evasion. Moreover, corrupt public officials abuse their public power to extort bribes from the private agents. In both types of interaction with the public sector, the private agents are bound to face uncertainty with respect to their disposable incomes. To analyse effects of this uncertainty, a stochastic dynamic growth model with the public sector is examined. It is shown that deterministic excessive red tape and corruption deteriorate the growth potential through income redistribution and public sector inefficiencies. Most importantly, it is demonstrated that the increase in corruption via higher uncertainty exerts adverse effects on capital accumulation, thus leading to lower growth rates.