ten little treasures of game theory and ten intuitive contradictions this paper reports laboratory data for games that are played only once these games span the standard categories static and dynamic games with complete and incomplete information for each game the treasure is a treatment in which behavior conforms nicely to predictions of the nash equilibrium or relevant refinement in each case however a change in the payoff structure produces a large inconsistency between theoretical predictions and observed behavior these contradictions are generally consistent with simple intuition based on the interaction of payoff asymmetries and noisy introspection about others decisions

first price auctions with resale abstract we present a simple model of first price auction with two bidders whose valuations are not identically distributed and where resale is possible between the bidders and given an explicit expression for the equilibrium strategies

rent seeking with bounded rationality an analysis of the all pay auction the winner take all nature of all pay auctions makes the outcome sensitive to decision errors which we introduce with a logit formulation the equilibrium bid distribution is a fixed point the belief distributions that determine expected payoffs equal the choice distributions determined by expected payoffs we prove existence uniqueness and symmetry properties in contrast to the nash equilibrium the comparative statics of the logit equilibrium are intuitive rent dissipation increases with the number of players and the bid cost overdissipation of rents is impossible under full rationality but is observed in laboratory experiments our model predicts this property

equilibrium and agency inadmissible agents in the public agency problem an agency relationship arises when one party the agent takes actions on behalf of another party a principal the theory of agency was first developed in different contexts by robert wilson 1968 1969 a michael spence and richard zeckhauser and the author 1973 1974 and has been extended in a number of different directions steven shavell for example has examined moral hazard issues associated with imperfectly monitoring the agent s effort and milton harris and artur raviv have looked at optimal contract structures this paper takes up some different issues motivated by the desire to study the qualitative properties of equilibrium in markets for agents

english auctions with resale an experimental study i design and test a simple english auction and two english auctions with resale but with different informational backgrounds all three treatments theoretically have the same equilibrium i find however that the possibility of resale alters behavior significantly in the two treatments with resale subjects deviated from both the nash prediction and the common results about bidding behavior in english auctions subjects tend to overbid when they are certain they can reap the whole surplus in the resale market i employ different models like qre and levels of reasoning and conclude that overbidding can be explained as a rational response to the noisy environment in markets with human participants that is as rational decision making when anticipating others to make errors when the outcome of the resale market is not certain there is significant signaling behavior and auction prices tend to be lower than the nash prediction

asymmetric auctions with resale an experimental study we study auctions with resale based on hafalir and krishna s 2008 6 model as predicted weak bidders bid more with resale than without so that average auction prices tend to increase when the equilibrium calls for weak types to bid higher than their values with resale they do but not nearly as much as the theory predicts in other treatments outcomes are much closer to the risk neutral nash model s predictions bid distributions for weak and strong types are more similar with resale than without in line with the theory

partial pooling at the reserve price in auctions with resale opportunities abstract two features common to many auctions are the use of reserve prices and the existence of secondary markets for the goods being sold even in simple symmetric settings the combination of these features can preclude existence of an equilibrium in symmetric separating bidding strategies with a reserve price sufficiently far below the maximum endogenous valuation a symmetric equilibrium still exists but with some types pooling at the reserve the optimal reserve price depends not only on the joint distribution of bidders information before and after the auction but also on how surplus is divided in the secondary market journal of economic literature classification numbers d44 c7 l1 d82

5 information impact and allocation rules in auctions with affiliated private values a laboratory study in affiliated private value auctions each bidder has perfect information regarding his her own value for the object at auction but higher values of the item for one bidder make higher values for other bidders more likely we report on a series of experiments examining three key implications of these auctions i in a first price auction public information about rivals values increases expected revenue ii an english auction increases expected revenue compared to a first price auction and iii a second price auction is isomorphic to an english auction in examining these issues we compare predictions of some ad hoc bidding models with nash equilibrium predictions in the first price auction experiments nash equilibrium bidding theory organizes the data better than either of two ad hoc bidding models public information about others valuations does increase average revenue but the increase in revenue is smaller and less reliable than predicted under risk neutral nash equilibrium bidding lower average revenue might be attributed to risk aversion while the high variability is attributed to a sizable frequency of individual bidding errors relative to the theory bidding theory precisely organizes english auction outcomes after a brief initial learning period the dominant strategy equilibrium does not organize second price auctions nearly as well as market prices persistently exceed predicted prices the difference between english and second price outcomes is attributed to effects of different information flows inherent in the structure of the two institutions on eliminating bidding errors revenue impacts of these two institutions relative to a first price auction are examined in light of observed bidding patterns

do auctioneers pick optimal reserve prices we investigate how auctioneers set reserve prices in auctions a well established theoretical result assuming risk neutrality of the seller is that the optimal reserve price should not depend on the number of participating bidders in a set of controlled laboratory experiments we find that seller behavior often deviates from the theoretical benchmarks we extend the existing theory to explore three alternative explanations for our results risk aversion anticipated regret and probability weighting after fitting our data to each of these models through parameter estimation techniques on both an aggregate and individual level we find that all three models are consistent with some of the characteristics of our data but that the regret model provides a slightly more favorable fit overall this paper was accepted by teck hua ho decision analysis

theory and misbehavior of first price auctions comment glenn harrison s recent 1989 article in this review has provoked the loudest debate yet heard among experimental economists his critique of the james cox vernon smith and james walker 1983a b 1985a b 1988 henceforth csw laboratory studies of first price sealed bid auctions with independent and private values in my view raises a fundamental methodological issue that is well worth debating and the csw research program deserves further discussion in this short comment i confine myself to what i see as the most important issues and do not try to address all evidence relevant to the ongoing debate first i summarize harrison s central argument very briefly after pointing out two shortcomings in harrison s specific analysis of csw i propose a methodological reconciliation finally and with some trepidation since my own experience with the auction data is relatively slight i suggest an alternative approach to understanding the anomalies discovered by csw

resale markets and the assignment of property rights the consumption of an indivisible good causes identity dependent externalities to non consumers we analyse resale markets where the current owner designs the trading procedure but cannot commit to future actions we ask the following questions 1 doer the identity of the initial owner matter for the determination of the final consumer 2 is the outcome always efficient the major conclusion of our paper is that the irrelevance of the initial structure of property rights arises in resale processes even if there are transaction costs that hinder efficiency this result complements the coasian view where the irrelevance of the assignment of property rights is a consequence of efficiency

auctions with anticipated regret theory and experiment this paper demonstrates theoretically and experimentally that in first price auctions overbidding with respect to the risk neutral nash equilibrium might be driven from anticipated loser regret felt when bidders lose at an affordable price different information structures are created to elicit regret bidders know they will learn the winning bid if they lose loser regret condition or the second highest bid if they win winner regret condition or they will receive no feedback regarding the other bids bidders in loser regret condition anticipated regret and significantly overbid however bidders in the winner regret condition did not anticipate regret jel d44

an experimental analysis of auctions with interdependent valuations abstract we study experiments in an auction setting with interdependent valuation groups of three players receive private signals and then bid for a single indivisible item valuations for the item differ within groups and depend asymmetrically on a bidder s own and other bidders signals theoretically the english auction yields efficient allocations while other standard auction formats fail to do so consistent with equilibrium predictions we find that an english auction yields significantly more efficiency than a second price sealed bid auction we also study the seller s expected revenue and the bidders expected profits and find that the experimental results are close to the theoretical predictions

the cyclical behavior of prices and relative prices i introduction correlations between shocks to prices and output provide evidence on the source of macroeconomic shocks for example den haan 2000 found positive correlations at short forecast horizons and negative correlations at longer forecast horizons for the consumer price index cpi and the index of industrial production ip 1 he interpreted these results to mean that demand shocks dominate in the short run while supply shocks dominate in the long run several other papers confirm the positive correlation between the cpi and the ip at short forecast horizons on the other hand some of these same authors have found a negative correlation between real gross domestic product gdp and the gdp deflator at short forecast horizons 2 this difference is disappointing since the results provide conflicting evidence on the nature of shocks at short horizons and puzzling since the cpi and the deflator are positively correlated as are ip and gdp an important distinction between pairing gdp with its deflator and pairing ip with the cpi is the extent to which products in the output index are matched to products in the price index gdp and the gdp deflator are based on the same set of goods and services on the other hand ip contains products such as those produced by mining whose prices are not included in the cpi and the cpi includes products such as housing services that are not included in ip in this paper we argue that the correlation between mismatched price and output indexes such at the cpi and ip can be and often is misleading the explanation for why it is important to use matched indexes of price and output is simple suppose that you are interested in the correlation between the price and the quantity of apples if instead you compute the correlation between the price of oranges and the quantity of apples the correlation is correct only if the relative price of oranges to apples does not vary with the quantity of apples if the relative price varies then the mismatched correlation differs in magnitude from and may even have the opposite sign of the matched one correlations between both matched and mismatched pairs are mostly negative positive correlations are rare and small for matched pairs but more frequent for mismatched pairs for example investment and the investment deflator are negatively correlated while investment and the consumption deflator are positively correlated our analysis below shows that these correlations imply that the relative price of consumption to investment may be positively correlated with investment previous authors have noted that the relative price of nondurables is procyclical which is consistent with the bias we find for mismatches these previous results are based on correlations between detrended variables we confirm that these findings hold when considering the correlation between forecast errors of the relative price of nondurables to durables and output measures 3 because there is no price index that matches ip and because correlations between mismatched price and output measures likely differ in size and may have the opposite sign of the correlation for matched pairs there is no way to be certain of the cyclical nature of the prices of goods included in the index of ip an examination of gdp components and price deflators provides reasons to be skeptical of the positive correlation between the cpi and the ip first matched pairs of price indexes and gdp components have small or negative correlations second correlations between mismatched price indexes and gdp components show that the bias created by mismatches is sometimes substantial further this bias tends to be positive when prices of nondurable goods such as the cpi or consumption deflator are mismatched with gdp components composed mostly of durable goods finally when ip is paired with deflators for durables investments or goods the correlation is either small or negative at short forecast horizons

asymmetric auctions with resale we study first and second price auctions with resale in a model with indepen dent private values with asymmetric bidders the resulting inefficiencies create a motive for post auction trade which in our model takes place via monopoly pricing the winner makes a take it or leave it offer to the loser we show a a first price auction with resale has a unique monotonic equilibrium and b with resale the expected revenue from a first price auction exceeds that from a second price auction the inclusion of resale possibilities thus permits a gen eral revenue ranking of the two auctions that is not available when these are excluded jel d44

experimental development of sealed bid auction theory calibrating controls for risk aversion we offer a brief survey of bidding theory in high price auctions of experimental studies of behavior in such auctions and of the interplay between the design and results of the experiments and efforts to further develop the theory two new series of experiments are reported the first applies a convex transformation of payoffs in an attempt to induce a lowering of subject bids as if the bidders had become less risk averse the second applies a method for inducing any prespecified utility function for risky choices on an individual we use it to induce as if risk neutral behavior both series use baseline control to calibrate the hypothesized effect of the procedures on riskaverse behavior

auctions with resale markets an application to u s forest service timber sales when bidders anticipate an opportunity for resale trade the value of winning an auction is determined in part by the option values of buying and selling in the secondary market one implication is that a bidder s willingness to pay at an auction increases with the expected level of competition between resale buyers empirical evidence from auctions of timber contracts supports this prediction and rejects standard models that ignore resale the estimated effect is smaller after policy changes expected to diminish the prevalence of resale additional evidence supports the predicted presence of a common value element introduced by the resale opportunity

speculation in standard auctions with resale in standard auctions resale creates a role for a speculator a bidder who is commonly known to have no use value for the good on sale we study this issue in environments with symmetric independent private value bidders for second price and english auctions the efficient value bidding equilibrium coexists with a continuum of inefficient equilibria in which the speculator wins the auction and makes positive profits first price and dutch auctions have an essentially unique equilibrium and whether or not the speculator wins the auction and distorts the final allocation depends on the number of bidders the value distribution and the discount factor speculators do not make profits in first price or dutch auctions

asymmetric information about rivals types in standard auctions an experiment this paper studies experimentally how information about rivals types affects bidding behavior in firstand second price auctions the comparative static hypotheses associated with information about rivals enables us to test the relevance of such information as well as the general predictions of the auction theory by providing an effective means to control for risk aversion and other behavioral motives that were difficult to control for in previous experiments our experimental evidence provides strong support for the theory and sheds light on the roles of risk aversion and the spite motive in first and second price auctions respectively

auctions versus negotiations which is the more profitable way to sell a company an auction with no reserve price or an optimally structured negotiation with one less bidder we show under reasonable assumptions that the auction is always preferable when bidders signals are independent for affiliated signals the result holds under certain restrictions on the seller s choice of negotiating mechanism the result suggests that the value of negotiating skill is small relative to the value of additional competition the paper also shows how the analogies between monopoly theory and auction theory can help derive new results in auction theory jel d44 g34 there are close analogies between standard price theory and the theory of auctions in an absolute english auction in which the price rises continuously until only one bidder remains and the seller is required to accept the final bid the sale price equals the lowest competitive price at which supply equals demand in the theory of optimal auctions the seller is treated as a monopolist who can choose any

theory and misbehavior of first price auctions recent experimental evidence appears to reject simple nash equilibrium models of bidding behavior in first price auctions the author presents a methodological critique of this evidence existing tests have concentrated on deviations of subjects from predictions in the message space of the action bid deviations the author suggests that it is more natural to evaluate subject behavior in expected payoff space he concludes that the evidence against the simple models is not significant enough to warrant their rejection copyright 1989 by american economic association