interpreting economic time series this paper explores some of the implications for econometric practice of the principle that people s observed behavior will change when their constraints change in dynamic contexts a proper definition of people s constraints includes among them laws of motion that describe the evolution of the taxes they must pay and the prices of the goods that they buy and sell changes in agents perceptions of these laws of motion or constraints will in general produce changes in the schedules that describe the choices they make as a function of the information that they possess until very recently received dynamic econometric practice ignored this principle the practice of dynamic econometrics should be changed so that it is consistent with the principle that people s rules of choice are influenced by their constraints this is a substantial undertaking and involves major adjustments in the ways that we formulate estimate and simulate econometric models

endogenous entry and self selection in private value auctions an experimental study this paper presents the results of an experimental study of endogenous entry in first price independent private value auctions n potential bidders simultaneously decide whether to participate in an auction or receive a known outside option in the second stage entrants submit bids after learning their own private values and the number of entrants an equilibrium model of heterogeneous risk averse bidders implies a self selection effect where bidding in the auction is lower with endogenous entry because only less risk averse bidders enter this effect is confirmed by the experiment we also observe excessive entry relative to the theoretical model

bidding behavior in descending and ascending auctions this research examines how individual differences and institutional practices influence consumer bidding in auctions bidders may be motivated by different goals e g thrill of winning the item with minimal attention to what they pay for it versus prudence winning the item at a price at or below its perceived value also innate or auctioneer induced differences may exist in the precision and salience of bidder cognitions about the item s value we report two studies on how these motivational and cognitive factors influence bids in descending and ascending auctions respectively each study also manipulated a situational variable wait time at each price step the two auctions realized different average prices for the same item set average bids were higher in the descending versus ascending auction in several study conditions in both auction formats bidders primed with thrill versus prudence bid higher but more precise and or salient values attenuated this goal effect among other results in the descending auction longer wait times elicited higher bids from bidders primed with thrill but not prudence in the ascending auction longer wait times produced lower bids for bidders primed with prudence but not thrill these findings on consumer bidding behavior have practical implications for auction design

regret and feedback information in first price sealed bid auctions we investigate the effect of regret related feedback information on bidding behavior in sealed bid first price auctions two types of regret are possible in this auction format a winner of the auction may regret paying too much relative to the second highest bid and a loser may regret missing an opportunity to win at a favorable price in theory under very general conditions being sensitive to winning and paying too much should result in lower average bids and being sensitive to missing opportunities to win at a favorable price should result in higher bids for example the u s government s policy of revealing losing bids may cause regret sensitive bidders to anticipate regret and bid conservatively decreasing the government s revenue we test these predictions in the laboratory and find strong support for both

learning by bidding we analyze a dynamic second price auction with an informed bidder and an uninformed bidder who upon seeing a posted price learns whether his valuation is above that price in the essentially unique equilibrium an informed bidder bids in the first period if her valuation is below some cutoff and bids only in the last period otherwise an uninformed bidder bids in every period to optimally change the price unless the price is above his valuation or he is the high bidder this model also provides a rationale behind the use of a secret reserve price in private value settings

equilibrium analysis of dynamic models of imperfect competition motivated by recent developments in applied dynamic analysis this paper presents new sufficient conditions for the existence of a markov perfect equilibrium in dynamic stochastic games the main results imply the existence of a markov perfect equilibrium provided the sets of actions are compact the set of states is countable the period payoff functions are upper semi continuous in action profiles and lower semi continuous in actions taken by rival firms and the transition function depends continuously on actions moreover if for each firm a static best reply set is convex the equilibrium can be taken in pure strategies we present and discuss sufficient conditions for the convexity of the best replies in particular we introduce new sufficient conditions that ensure the dynamic programming problem each firm faces has a convex solution set and deduce the existence of a markov perfect equilibrium for this class of games our results expand and unify the available modeling alternatives and apply to several models of interest in industrial organization including models of industry dynamics

war of attrition evidence from a laboratory experiment on market exit i introduction young industries often undergo a process of shakeout gort and klepper 1982 and klepper 1996 attracting excess firms and gradually shedding them over time more mature industries are likewise often forced to contract in the face of recession or product specific negative demand shocks when an overcrowded industry is forced to shrink which firms exit and which ones survive the conventional answer in economics is that overcrowded industries tend to shed inefficient firms and retain efficient ones we might call this survival of the most efficient a process analogous to natural selection that can adaptively improve the efficiency of industries over time nelson and winter 1982 fudenberg and tirole 1986 model firms exit decisions in overcrowded duopoly markets as wars of attrition and show that the intuition of survival of the most efficient has merit even if firms have little information regarding their costs relative to their competitors however the equilibrium of their game is complex involving a solution to a system of differential equations since neither fortune 500 chief executive officers in the naturally occurring markets nor undergraduate participants in laboratory markets deliberately solve differential equations when deciding whether or not to exit a declining market it is an open question as to how well fudenberg and tirole s rational reconstruction of the exit decision corresponds to the facts of how people make such decisions we report the results of a laboratory experiment designed to answer this question nearly 200 subjects in 16 sessions participated in a total of 3 800 wars of attrition based on fudenberg and tirole s model at the beginning of each period subjects were randomly paired and given a private cost draw that usually induced negative net per second payoffs in a shared market and positive net payoffs per second in monopoly subjects then decided in real time whether and when to exit the market never to return monotonic equilibrium strategy functions predict higher cost inefficient participant exit at an earlier time than their lower cost competitor that is the relatively efficient competitor survives in the market we find that fudenberg and tirole s model organizes our data surprisingly well especially considering its complexity we observe exit by the higher cost firm in 76 of cases when differences between the costs faced by firms are substantial the rate of efficient exit rises to nearly 100 the data on exit times are likewise quite close to the point predictions particularly in the crucial higher portion of the cost distribution that generally governs exit times the median deviation from equilibrium exit times falls to zero by the end and on average subjects earn payouts identical to those predicted in equilibrium our design permits tests of two other conjectures in fudenberg and tirole first our data supports fudenberg and tirole s core comparative static prediction that a decrease in the ex ante likelihood of actually being in a war of attrition leads to an increase in the speed of exit 1 second half of our sessions use costs framed as fixed costs suffered while in the market and half use costs framed as opportunity costs earned by exiting the market there is no evidence that this treatment variable affects exit behavior this isomorphism between gains and losses predicted by standard theory stands in stark contrast to evidence from previous individual decision making experiments suggesting asymmetries in how people react to potential losses and potential gains although wars of attrition have an important place in the game theoretic literature there are surprisingly few experimental studies directly relating to them 2 3 bilodeau childs and mestelman 2004 study a three player full information war of attrition framed as a volunteer game and report widespread failure of equilibrium predictions the predicted volunteer in a subgame perfect nash equilibrium only volunteers 41 of the time

a non expected utility model and its application in practical auctions this article presents a non expected utility decision model which is nonlinear in the winning probabilities the model not only explicitly expresses bidders attitudes to risk but also addresses t

framing effects in public goods prospect theory and experimental evidence this paper studies both theoretically and experimentally frame effects in the context of a public good game in which players have to make a costly contribution either i to achieve or ii not to lose a non excludable monetary prize our protocol leads to public good provision not deterioration only if a certain contribution level is achieved since both frames differ with respect to the reference point we use prospect theory to derive testable predictions in particular prospect theory predicts more contribution in the second frame our evidence suggests that a subjects behavior is highly sensitive to frames and b the theoretical prediction is confirmed except when the threshold is low we also estimate the parameters which better suit our experimental evidence partly confirming previous results in the literature

the fiscal theory of the price level in a world of low interest rates abstract a central equation for the fiscal theory of the price level ftpl is the government budget constraint or government valuation equation which equates the real value of government debt to the present value of fiscal surpluses in the past decade the governments of most developed economies have paid very low interest rates and there are many other periods in the past in which this has been the case in this paper we revisit the implications of the ftpl in a world where the rate of return on government debt may be below the growth rate of the economy considering different sources for the low returns dynamic inefficiency the liquidity premium of government debt or its favorable risk profile this article is part of a special issue entitled fiscal and monetary policies

an experiment on learning with limited information nonconvergence experimentation cascades and the advantage of being slow abstract we present the results of an experiment on learning in a continuous time low information setting for a dominance solvable version of a cournot oligopoly with differentiated products we find little evidence of convergence to the nash equilibrium in an asynchronous setting characterized by players updating their strategies at different frequencies play tends toward the stackelberg outcome which favors the slower player convergence is significantly more robust for a serial cost sharing game which satisfies a stronger solution concept of overwhelmed solvability as the number of players grows this improved convergence tends to diminish seemingly driven by frequent and highly structured experimentation by players leading to a cascading effect in which experimentation by one player induces experimentation by others these results have implications both for traditional oligopoly competition and for a wide variety of strategic situations arising on the internet

a comparison of buyer determined and price based multiattribute mechanisms reverse auctions are fast becoming the standard for many procurement activities in the past the majority of such auctions have been solely price based but increasingly attributes other than price affect the auction outcome specifically the buyer uses a scoring function to compare bids and the bid with the highest score wins we investigate two mechanisms commonly used for procurement in business to business markets in a setting in which buyers welfare is affected by exogenous nonprice attributes such as the quality service and past relationships under both mechanisms bidders bid based on price but in the buyer determined mechanism the buyer is free to select the bid that maximizes her surplus while in the price based mechanism the buyer commits to awarding the contract to the low price bidder we find both in theory and in the laboratory that the buyer determined mechanism increases the buyer s welfare only as long as enough suppliers compete if the number of suppliers is small and the correlation between cost and quality is low the buyer is better off with the price based mechanism these findings are intended to help procurement managers make better decisions in designing procurement mechanisms for a variety of settings

does displaying probabilities affect bidding in first price auctions abstract overbidding with respect to risk neutral nash predictions in first price auction experiments has been consistently reported in the literature one possible explanation for overbidding is that participants in these experiments do not have a clear perception of probabilities which causes them to bid aggressively we test whether displaying probabilities of winning produces systematic differences in bidding in our design previous auction outcomes are not revealed across treatments no significant differences in behavior across treatments are obtained our results are in contrast to previous experiments which suggest that displaying probabilities could reduce the extent of overbidding

testing for risk aversion a stochastic dominance approach we conduct an experiment based on the stochastic dominance framework in order to investigate risk aversion in isolation of other effects such as subjective probability distortion the certainty effect and framing effects the result is striking most individuals are not risk averse 2001 elsevier science b v all rights reserved

testing for indeterminacy an application to u s monetary policy reply this paper considers a prototypical new keynesian model in which the equilibrium is undetermined if monetary policy is passive the likelihood based estimation of dynamic equilibrium models is extended to allow for indeterminacies and sunspot fluctuations we construct posterior weights for the determinacy and indeterminacy region of the parameter space and estimates for the propagation of fundamental and sunspot shocks according to the estimated model u s monetary policy post 1982 is consistent with determinacy whereas the pre volcker policy is not we find that before 1979 indeterminacy substantially altered the propagation of shocks

robustness of bidder preferences among auction institutions i introduction the answer to the question of how bidders choose to enter one auction versus an alternative competing auction is important to understand in providing a complete picture of the nature of endogenous entry decisions into auctions the issue of how a bidder chooses which among alternative auctions to enter as well as whether to enter an auction at all is of substantial importance to auctioneers attempting to attract bidders to their auctions there is a growing literature addressing issues in endogenous entry in auctions there are several papers such as engelbrecht wiggans 1993 pevnitskaya 2004 and palfrey and pevnitskaya 2008 that consider the decision of whether to enter an auction or not and study the effect of endogenous entry on bidding behavior there is a much larger group for example harstad 1990 engelbrecht wiggans 1993 levin and smith 1994 mcafee 1993 and mcafee and mcmillan 1987 that considers competition between auctioneers in which the auctioneers are competing along some characteristic such as entry price we consider the case in which auctioneers may be competing with each other based on the choice of auction mechanism our interest is in the degree to which the auction mechanism itself might impact the entry decisions of potential bidders of course there would be a direct pecuniary impact of the mechanism in that bidders should be more likely to enter auction mechanisms that they believe allow them to get lower prices but there may be other cognitive issues in regard to the structure of the mechanism that may also impact the choice behavior in ivanova stenzel and salmon iss 2004a we introduced an experimental design aimed at eliciting and measuring preferences subjects might possess for different auction institutions and applied the design to testing bidder preferences between ascending a dynamic mechanism and sealed bid first price a static mechanism auctions it seems reasonable to expect bidders to have preferences between these two auction mechanisms due to the strategic differences between them in a first price auction the winner pays a price equal to his own bid whereas in the ascending auction he pays a price that is an increment above the second highest bid these differences might result in difficulty of deciding how to bid and in the possibility of experiencing some form of regret 1 the design involved having subjects make a choice between entering into a two bidder sealed bid first price auction versus a two bidder ascending auction each with different entry prices by varying the entry prices we could measure the subjects willingness to pay for either auction our main finding in the paper was that while subjects exhibited strong preferences for the ascending auction at equal entry prices they were not willing to pay up to the expected profit difference between the two auctions to participate in an ascending auction thus they ended up entering the supposedly less preferred sealed bid first price auction even in situations in which they would expect to make a higher net surplus including the cost of the entry fee by entering into the ascending auction instead that paper proposed one possible answer to the puzzle that involved assuming that bidders were risk averse in their bidding behavior and then risk averse to the same degree in their auction choice behavior this explanation worked because neither risk averse nor approximately risk neutral bidders should be expected to pay much to enter into an ascending auction instead of a sealed bid first price auction just as we observed in the experiment for the most risk averse bidders this is because while they bid the highest in the first price auction and therefore expected little surplus in the event that they win they consequently end up winning with higher probability than less risk averse bidders this is a trade off risk a verse bidders are willing to accept and consequently it is easy to show that highly risk averse bidders should not be willing to pay much to get into the more lucrative though risky ascending auction

markov perfect equilibria in altruistic growth economies with production uncertainty this paper concerns the existence of markov perfect equilibria in altruistic growth economies previous work on deterministic models has established existence only under extremely restrictive conditions we show that the introduction of production uncertainly yields an existence theorem for aggregative infinite horizon models with very general forms of altruism journal of economic literature classification numbers

a quantal response equilibrium model of order statistic games abstract this paper applies mckelvey and palfrey s games econ behav 10 1995 6 notion of quantal response equilibrium to a class of order statistic coordination games closely related to those studied by van huyck et al am econ rev 80 1990 234 quart j econ 106 1991 885 and van huyck et al evidence on learning in coordination games manuscript texas a m university 1996 and those recently analyzed by anderson et al games econ behav 34 2001 177 with quadratic effort costs the limiting qre as the noise goes to zero in their games is the most efficient equilibrium this result contrasts with anderson et al s conclusion for order statistic games with linear effort costs and allows a fuller assessment of the qre s success in describing the limiting outcomes in van huyck et al s experiments

optimal bidding in auctions from a game theory perspective abstract the game theoretic perspective in auction bidding has provided a powerful normative framework for the analysis of auctions and it has generated an impressive volume of research contributions tracing this research we review key recent advances which have greatly expanded our understanding of the operation of auctions and produced a more accurate analysis of mechanism design and optimal bidding we follow various experimental studies which have shown that the predictive power of auction theory remains in many cases limited for this reason we concentrate on research themes which enhance the applicability of auction theory leading to more realistic descriptions of bidding behaviors we identify important innovations which expand the environment of auction bidding and carry us beyond rational decision making we conclude providing directions of future research and discussing their implications

risk aversion and overbidding in first price sealed bid auctions new experimental evidence bidding above the risk neutral nash equilibrium in first price sealed bid auctions has traditionally been ascribed to risk aversion later studies however offer other explanations and even argue that risk aversion plays no or a minor role in a novel experimental design we directly test the relationship between risk aversion and overbidding by systematically varying the distribution of risk attitudes in auction markets we find a significant relationship between our measure of risk aversion and overbidding jel d44 c91

are you risk averse over other people s money decisions with uncertain outcomes are often made by one party in settings where another party bears the consequences whenever an individual is delegated to make decisions that affect others such as in the typical corporate structure does the individual make decisions that reflect the risk preferences of the party bearing the consequences we examine this question in two simple settings lottery choices and sealed bid auctions using controlled laboratory experiments we find that when an individual makes a decision for an anonymous stranger there is a tendency to exhibit less risk aversion this reduction in risk aversion is relative to his or her own preferences and it is also relative to his or her belief about the preferences of others this result has significant implications for the design of contracts between principals and agents

an experimental test of the commitment cost theory are used in making public policy recommendations carrying out cost benefit analysis and formulating marketing and pricing strategies unlike traded goods individuals are not likely familiar with valuing and pricing nonmarket goods as such a key characteristic among almost all nonmarket goods is uncertainty regarding value that individuals have uncertainty regarding the value they have for nonmarket goods is supported by a number of recent empirical findings e g johannesson et al loomis and ekstrand van kooten krcmar and bulte among other things uncertainty may be a result of unfamiliarity with the good in question for example a poll of scottish individuals found that over 70 were unfamiliar with

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

the logit equilibrium a perspective on intuitive behavioural anomalies costs associated with deviations from the nash equilibrium these payoff asymmetry effects are incorporated in an approach that introduces noisy behavior via a logit probabilistic choice function in the resulting logit equilibrium behavior is characterized by a probability distribution that satisfies a rational expectations consistency condition the beliefs that determine players expected payoffs match the decision distributions that arise from applying the logit rule to those expected payoffs we prove existence of a unique symmetric logit equilibrium and derive comparative statics results the paper provides a unified perspective on many recent laboratory studies of games in which nash equilibrium predictions are inconsistent with both intuition and experimental evidence

computable markov perfect industry dynamics we provide a general model of dynamic competition in an oligopolistic industry with investment entry andexit toensurethatthereexistsacomputationallytractablemarkov perfectequilibrium we introduce firm heterogeneity in the form of randomly drawn privately known scrap values and setup costs into the model our game of incomplete information always has an equilibrium in cutoff entry exit strategies in contrast the existence of an equilibrium in the ericson and pakes model of industry dynamics requires admissibility of mixed entry exit strategies contrary to the assertion in their article that existing algorithms cannot cope with in addition we provide a condition on the model s primitives that ensures that the equilibrium is in pure investment strategies building on this basic existence result we first show that a symmetric equilibrium exists under appropriate assumptions on the model s primitives second we show that as the distribution of the random scrap values setup costs becomes degenerate equilibria in cutoff entry exit strategies converge to equilibria in mixed entry exit strategies of the game of complete information

eliciting subjective probabilities with binary lotteries abstract we evaluate a binary lottery procedure for inducing risk neutral behavior in a subjective belief elicitation task prior research has shown this procedure to robustly induce risk neutrality when subjects are given a single risk task defined over objective probabilities drawing a sample from the same subject population we find evidence that the binary lottery procedure also induces linear utility in a subjective probability elicitation task using the quadratic scoring rule we also show that the binary lottery procedure can induce direct revelation of subjective probabilities in subjects with popular non expected utility preference representations that satisfy weak conditions

learning to bid the design of auctions under uncertainty and adaptation we examine auction design in a context where symmetrically informed adaptive agents with common valuations learn to bid for a good despite the absence of private valuations asymmetric information or risk aversion bidder strategies do not converge to the bertrand nash equilibrium strategies even in the long run deviations from equilibrium strategies depend on uncertainty regarding the value of the good auction structure the agents learning model and the number of bidders although individual agents learn nash bidding strategies in isolation the learning of each agent by flattening the best reply correspondence of other agents blocks common learning these negative externalities are more severe in second price auctions auctions with many bidders and auctions where the good has an uncertain value ex post

collusion in uniform price auctions experimental evidence and implications for treasury auctions in uniform price auctions of shares there exist collusive equilibria in which bidders capture the entire surplus from the auction as well as competitive equilibria in which the auctioneer captures the entire surplus from the auction we provide experimental evidence that in uniform price auctions non binding pre play communication facilitates convergence to collusive equilibrium outcomes on the other hand regardless of the opportunities for communication in discriminatory auction experiments subject strategies conform closely with the unique equilibrium in undominated strategies in which bidders gains are equal to the smallest tick size in the bidding schedule this evidence suggests that uniform price auctions of treasury securities may result in lower revenues than the currently employed discriminatory procedure

auctions with toeholds an experimental study of company takeovers we run experiments on english auctions where the bidders already own a part toehold of the good for sale the theory predicts a very strong explosive effect of even small toeholds while asymmetric toeholds do have an effect on bids and revenues in the lab which gets stronger the larger the asymmetry it is not nearly as strong as predicted we explain this by analyzing the flatness of the payoff functions which leads to large deviations from the equilibrium strategies being relatively costless this is a general fundamental weakness of this type of explosive equilibria which makes them fail when human players are involved our analysis shows that a levels of reasoning model explains the results better where this equilibrium fails moreover we find that although big toeholds can be effective in a takeover battle the cost to acquire them might be higher than the strategic benefit they bring

regime switching debt and taxation the effects of changes to the tax rate are studied within a framework where an estimated regime switching process for the debt output ratio is embedded in a standard growth model the regime is a hidden state variable so agents face a signal extraction problem consequently agents incorporate the possibility of switching to different fiscal regimes when forming expectations over future taxes decision rules have additional nonlinearity relative to fixed regime models income allocation and the tax elasticity of investment depend on agents inference regarding the regime specifically the tax elasticity can be either positive or negative depending on whether agents perceive a tax reform as an intra regime shock or change in regime

continuous stochastic games of capital accumulation with convex transitions abstract we consider a discounted stochastic game of common property capital accumulation with nonsymmetric players bounded one period extraction capacities and a transition law satisfying a general strong convexity condition we show that the infinite horizon problem has a markov stationary subgame perfect equilibrium and that every finite horizon truncation has a unique markovian equilibrium both in consumption functions which are continuous and nondecreasing and have all slopes bounded above by 1 unlike previous results in strategic dynamic models these properties are reminiscent of the corresponding optimal growth model journal of economic literature classification codes c73 o41 q20

overbidding and overspreading in rent seeking experiments cost structure and prize allocation rules we study experimentally the effects of cost structure and prize allocation rules on the performance of rent seeking contests most previous studies use a lottery prize rule and linear cost and find both overbidding relative to the nash equilibrium prediction and significant variation of efforts which we term overspreading we investigate the effects of allocating the prize by a lottery versus sharing it proportionally and of convex versus linear costs of effort while holding fixed the nash equilibrium prediction for effort we find the share rule results in average effort closer to the nash prediction and lower variation of effort combining the share rule with a convex cost function further enhances these results we can explain a significant amount of non equilibrium behavior by features of the experimental design these results contribute towards design guidelines for contests based on behavioral principles that take into account implementation features of a contest

advice and behavior in intergenerational ultimatum games an experimental approach abstract in the real world when people play a game they often receive advice from those that have played it before them such advice can facilitate the creation of a convention of behavior this paper studies the impact of advice on the behavior subjects who engage in a non overlapping generational ultimatum game where after a subject plays he is replaced by another subject to whom he can offer advice our results document the fact that allowing advice fosters the creation of a convention of behavior in ultimatum games in addition by reading the advice offered we conclude that arguments of fairness are rarely used to justify the offers of senders but are relied upon to justify rejections by receivers

a theory of dynamic oligopoly ii price competition kinked demand curves and edgeworth cycles we provide game theoretic foundations for the classic kinked demand curve equilibrium and edgeworth cycle we analyze a model in which firms take turns choosing prices the model is intended to capture the idea of reactions based on short run commitment in a markov perfect equilibrium mpe a firm s move in any period depends only on the other firm s current price there are multiple mpe s consisting of both kinked demand curve equilibria and edgeworth cycles in any mpe profit is bounded away from the bertrand equilibrium level we show that a kinked demand curve at the monopoly price is the unique symmetric renegotiation proof equilibrium when there is little discounting we then endogenize the timing by allowing firms to move at any time subject to short run commitments we find that firms end up alternating thus vindicating the ad hoc timing assumption of our simpler model we also discuss how the model can be enriched to provide explanations for excess capacity and market sharing keiiwords tacit collusion markov perfect equilibrium kinked demand curve edgeworth cycle excess capacity market sharing endogenous timing

tests of a heterogeneous bidders theory of first price auctions abstract this paper reports the results of eight first price sealed bid auction market experiments using cash motivated subjects to test a constant relative risk averse model crram of equilibrium bidding behavior of heterogeneous bidders

learning by doing organizational forgetting and industry dynamics learning by doing and organizational forgetting have been shown to be important in a variety of industrial settings this paper provides a general model of dynamic competition that accounts for these economic fundamentals and shows how they shape industry structure and dynamics previously obtained results regarding the dominance properties of flrms pricing behavior no longer hold in this more general setting we show that forgetting does not simply negate learning rather learning and forgetting are distinct economic forces in particular a model with learning and forgetting can give rise to aggressive pricing behavior market dominance and multiple equilibria whereas a model with learning alone cannot

eliciting and utilizing willingness to pay evidence from field trials in northern ghana we utilize the becker degroot marschak 1964 mechanism to estimate the willingness to pay for clean drinking water technology in northern ghana the bdm mechanism has attractive properties for empirical research allowing us to directly estimate demand compute heterogeneous treatment effects and study the screening and causal effects of prices with minor modifications to a standard field experiment setting we demonstrate the implementation of bdm along these three dimensions compare it to the standard take it or leave it method for eliciting willingness to pay and discuss practical issues for implementing the mechanism in true field settings jel classifications c93 d12 d82 l11 l31

learning and noisy equilibrium behavior in an experimental study of imperfect price competition we consider a duopoly pricing game with a unique bertrand nash equilibrium the high price firm has a nonvanishing market share however and intuition suggests that observed prices may be positively related to this market share this relationship is implied by a model in which players make noisy logit best responses to expected payoff differences the resulting logit equilibrium model was used to design an experiment in which the high price firm s market share varies the model accurately predicts the final period price averages a naive learning model predicts the observed differences in the time paths of average prices

price formation in single call markets this paper reports a laboratory experiment designed to examine the price formation process in a simple market institution the single call market the experiment features random values and costs each period so each period generates a new price formation observation other design features are intended to enhance the predictive power of the bayesian nash equilibrium bne theory developed recently for this trading institution we find that the data support several qualitative implications of the bne but that subjects bid and ask behavior is not as responsive to changes in the pricing rule as the bne predictions bids and asks tend to reveal more of the underlying values and costs than predicted particularly when subjects are experienced nevertheless observed trading efficiency falls below the bne prediction the results offer more support for the bne when subjects compete against nash robot opponents a simple learning model accounts for several of the deviations from bne

subjective probabilities in games an application to the overbidding puzzle this article illustrates how the joint elicitation of subjective probabilities and preferences may help us understand behavior in games we conduct an experiment to test whether biased probabilistic beliefs may explain overbidding in first price auctions the experimental outcomes indicate that subjects underestimate their probability of winning the auction and indeed overbid when provided with feedback on the precision of their predictions subjects learn to make better predictions and to curb significantly overbidding the structural estimation of different behavioral models suggests that biased probabilistic beliefs are a driving force behind overbidding and that risk aversion plays a lesser role than previously believed

monetary policy regimes and beliefs this paper investigates the role of beliefs over monetary policy in propagating the effects of monetary policy shocks within the context of a dynamic stochastic general equilibrium model in this model monetary policy periodically switches between low and high money growth regimes when individuals cannot observe the regime directly they must draw inferences over regime type based on historical money growth rates the authors show that for an empirically plausible money growth process beliefs evolve slowly in the wake of a regime change as a result their model is able to capture some of the observed persistence of real and nominal variables following such a regime change

information and conspiracy in sealed bid auctions abstract this paper examines the allocative properties of the sealed bid institution when different aspects of the available information to bidders are considered specifically we examine a the effect on price determination in repeated sealed bid auctions of post auction revelation of losing bids and b the effect on price determination when conspiratorial discussions are allowed

risk aversion and the winner s curse this article analyzes an auction in which bidders see independent components of a common prize value the nash equilibrium for two rational bidders is shown to be independent of risk attitudes the information structure allows explicit calculation of an alternative equilibrium in which naive bidders do not correctly discount the value of the prize contingent on winning and thus they suffer the winner s curse subjects in a laboratory experiment clearly fall prey to the winner s curse the data conform most closely to the predictions of the naive model moreover the level of risk aversion implied by fitting the naive model is similar to an independent risk aversion measure obtained in a separate private value bidding exercise

out of equilibrium bids in first price auctions wrong expectations or wrong bids deviations from risk neutral equilibrium bids in auctions can be related to inconsistent expectations with correct best replies or correct expectations but deviant best replies e g because of risk aversion regret quantal response mistakes to distinguish between these two explanations we use a novel experimental procedure and study expectations together with best replies in symmetric and asymmetric auctions we extensively test the internal validity of this setup we find that deviations from equilibrium bids do not seem to be because of to wrong expectations but because of deviations from a risk neutral best reply

monetary rewards and decision cost in experimental economics a survey of thirty one experimental studies which report data on the comparative effects of monetary rewards and opportunity cost shows 1 several studies in which increased rewards shift the central tendency of the data toward the predictions of rational models 2 in virtually all cases rewards reduce the variance of the data around the predicted outcome this is consistent with a model in which rewards are balanced against decision cost in agent behavior and explicates the argument that when rational models fail it can be attributed to low opportunity cost of deviations from the rational prediction

monetary and fiscal policy switching a growing body of evidence finds that policy reaction functions vary substantially over different periods in the united states this paper explores how moving to an environment in which monetary and fiscal regimes evolve according to a markov process can change the impacts of policy shocks in one regime monetary policy follows the taylor principle and taxes rise strongly with debt in another regime the taylor principle fails to hold and taxes are exogenous an example shows that a unique bounded non ricardian equilibrium exists in this environment a computational model illustrates that because agents decision rules embed the probability that policies will change in the future monetary and tax shocks always produce wealth effects when it is possible that fiscal policy will be unresponsive to debt at times active monetary policy like a taylor rule in one regime is not sufficient to insulate the economy against tax shocks in that regime and it can have the unintended consequence of amplifying and propagating the aggregate demand effects of tax shocks the paper also considers the implications of policy switching for two empirical issues

generalizing the taylor principle reply forward looking economic agents base decisions not only on monetary policy choices today but also on the expected future path of policy choices davig and leeper 2007b examine the implications of this basic feature of rational expectations in environments in which policy rules or regimes undergo recurring changes when agents expectations functions embed the possibility of policy regime changes in the future the nature of rational expectations equilibria can be altered in fundamental ways spillovers from anticipated future regimes can dramatically change the current equilibrium even if current policy hawkishly reacts to combat incipient inflation for example the possibility of moving to a more dovish regime in the future can raise the volatility of inflation today because determinacy of equilibrium depends on policy behavior in the long run conditions for a determinate equilibrium depend on current policy all possible future policies and the transi tion probabilities among policy regimes characteristics of the entire policy process some thing akin to davig and leeper s long run taylor principle determine whether a model has a

eliciting beliefs proper scoring rules incentives stakes and hedging accurate measurements of probabilistic beliefs have become increasingly important both in practice and in academia introduced by statisticians in the 1950s to promote truthful reports in simple environments proper scoring rules psr are now arguably the most popular incentivized mechanisms to elicit an agent s beliefs this paper generalizes the analysis of psr to richer environments relevant to economists more speci cally we combine theory and experiment to study how beliefs reported with a psr may be biased when i the psr payments are increased ii the agent has a nancial stake in the event she is predicting and iii the agent can hedge her prediction by taking an additional action our results reveal complex distortions of reported beliefs thereby raising concerns about the ability of psr to recover truthful beliefs in general economic environments

the existence of equilibrium in discontinuous economic games i theory the article presents information about the existence of equilibrium in discontinuous economic games in this paper and its sequel presents study the existence of nash equilibrium in games where agents payoff functions are discontinuous the enquiry is motivated by a number of recent studies that have uncovered serious existence problems in seemingly innocuous economic games in the sequel to this paper authors have explained the utility function in the economic games referred to earlier are neither continuous nor quasi concave however they demonstrate that the payoff functions in mildly modified versions of these constructs exhibit two weaker forms of continuity which together with the requirement of quasi concavity suffice for the existence of an equilibrium from this one may conclude that at least in the modified versions of these models discontinuities in the payoff functions are not the real source of the problem rather it is the failure of the payoff functions to the quasi concave which is responsible for the non existence of equilibrium these observations bear on the existence of nash equilibrium in pure strategies

preference reversal real world lotteries and lottery interested subjects prefer lce reversal or choice reservation price inconsistency has been documented experimentally for zrtain types of lotteries we argue that the relevance of these findings for realworld markets is uncertain because the type of objects used cannot exist on a market and because the extent to which the subjects had any real interest in the objects is unknown using reai world lotteries we have tested choice price consistency on subjects who prefer lotteries ta cash preference reversal was observed but the frequency was much lower than in earlier experiments there were no differences between subjects who qualified as lottery interested and those who did not 1 intmduction

asymmetry in first price auctions with affiliated private values collusion and heterogeneity across firms may introduce asymmetry in bidding games a major difficulty in asymmetric auctions is that the bayesian nash equilibrium strategies are solutions of an intractable system of differential equations we propose a simple method for estimating asymmetric first price auctions with affiliated private values considering two types of bidders we show that these differential equations can be rewritten using the observed bid distribution we establish the identification of the model characterize its theoretical restrictions and propose a two step non parametric estimation procedure for estimating the private value distributions an empirical analysis of joint bidding in ocs auctions is provided copyright 2003 john wiley sons ltd

theory and misbehavior in first price auctions comment in his recent paper in this review glenn harrison 1989 argues that the conclusions of james cox et al 1982 1983 1985 1988 in their studies of first price private value auctions are not well supported because of shortcomings in the way their experimental investigations were designed analyzed and reported harrison argues that the expected cost of deviations from risk neutral nash equilibrium rnne bidding in these auctions was quite small less than 0 05 at the median so that in terms of expected monetary payoffs payoff space many subjects had little to lose from deviating from the rnne strategy harrison suggests that the significance of the differences cox vernon smith and james walker hereafter csw report between subjects bids and the rnne bids deviations in the message space may therefore need to be reexamined in discussing harrison versus csw we have three primary points to make first in arguing that it is more natural to evaluate subject behavior in expected payoff space harrison 1989 p 749 we think harrison has overstated his case however we agree with his more important point that looking at the cost of deviations is a useful diagnostic tool for determining when experimenters are likely to have lost control over subjects incentives further as we will show in section i this part of harrison s critique applies with special force to csw s studies of bidding second a broader examination of the results of private value auction experiments indicates that risk aversion cannot be the only factor and may well not be the most important factor behind bidding above the rnne found so often in first price privatevalue auctions the most telling evidence here is bidding above the dominant bid price found in second price auctions kagel et al 1987 kagel and levin 1990 and the risk loving found under several treatment conditions in csw s 1984 own multipleunit discriminative auctions auctions in which the high bidders pay their bid price these and other data inconsistent with risk averse bidding are largely ignored in csw 1988 but are nevertheless relevant to the substantive issue of risk aversion in private value auctions they are discussed in section ii third there are data gathered in other investigations which provide strong support for the view that the deviations from rnne bidding reported in first price auctions are not the results of the low expected cost of such deviations however these data unlike the higher stakes payoff data that csw offer in response to harrison are not consistent with csw s subsidiary conclusions that the data can be well accounted for by a narrow class of risk aversion parameters for the bidders together with the assumption that all agents are playing a nash equilibrium of the resulting game of incomplete information a key difference between these experiments and csw s is that if subjects do not respond to csw s treatment condition increasing the payoffs from experimental to u s dollars their behavior will be consistent with csw s theory in contrast department of economics university of pittsburgh pittsburgh pa 15260 we thank jack ochs and emilie roth for thoughtful discussions on earlier drafts of the paper jim cox and glenn harrison for helpful comments on the initial draft of the paper susan garvin for research assistance and ray battalio carl kogut and don meyer for providing us with access to their data research support was provided by the information science and technology and economics divisions of the national science foundation the alfred p sloan foundation and the russell sage foundation the usual caveat applies with special force iwe do not respond to specific comments that csw 1992 make in response to our comment as in order to avoid indefinite regress the ground rules for this debate required us to comment on csw s criticism of harrison after which they would be given the opportunity to respond to our comment

the effects of payoff magnitude and heterogeneity on behavior in 2 2 games with unique mixed strategy equilibria the logit version of quantal response equilibrium predicts that equilibrium behavior in games will vary systematically with payoff magnitudes if all other factors are held constant including the nash equilibria of the game we explore this in the context of a set of asymmetric 2x2 games with unique totally mixed strategy equilibria the data provide little support for the payoff magnitude predictions of the logit equilibrium model we extend the theoretical quantal response equilibrium model to allow for heterogeneity and find that the data fit the heterogeneous version of the theory significantly better

nonlinear behavior in sealed bid first price auctions the extent to which the behavior of people is consistent with game theoretic principles is investigated in a first price sealed bid auction environment three linear rules of thumb with increasing complexity are used as benchmarks to gauge the accuracy of the constant relative risk aversion model crram in addition the crram is tested against the relaxation of the rational expectation hypothesis existing competitive bidding experiments cannot clearly distinguish between game theoretic models and linear markdown rules on an individual level within the parametric environments studied and reported in the experimental literature game theoretic solutions are linear over the range of private values in which bid functions are estimated in this study agents drew values from non uniform distributions as a result the game theoretic bidding behavior is nonlinear due to the nonlinearity special econometric and numerical techniques are applied to solve the model and obtain the estimates the crram exhibits good fit of the data the pseudo r2 is greater than 0 8 in 90 percent of the subjects the crram is more accurate than the markdown model mm and the simple ad hoc model simam but not as accurate as the sophisticated ad hoc model sop am the data also supports the relaxation of the rational expectation hypothesis and suggests that substantial increases in the predictive power of game theoretic models can be gained from improvements in the theory of belief formation

monetary policy regime shifts and inflation persistence abstract using bayesian methods we estimate a markov switching new keynesian msnk model that allows shifts in the monetary policy reaction coefficients and shock volatilities with u s data we find that a more aggressive monetary policy regime was in place after the volcker disinflation and before 1970 than during the great inflation of the 1970s our estimates also indicate that a low volatility regime has been in place during most of the sample period after 1984 we connect the timing of the different regimes to a measure of inflation persistence

individual behavior of first price auctions the importance of information feedback in computerized experimental markets abstract this article reports the results of an individual choice experiment designed to test the nash equilibrium predictions of the first price sealed bid auction a subject faced in 100 auctions always the same resale value and competed with computer simulated bids the design used between subjects variation and involved information feedback as the treatment variable earlier experimental work on first price auctions has frequently reported an overbidding relative to the risk neutral nash equilibrium our data provide evidence that overbidding can be fostered by the standard information feedback in auction experiments which after each auction reveals the winning bid only by means of learning direction theory we explain the individual bidding dynamics in our experiment finally we apply impulse balance theory and make long run predictions of individual bidding behavior

combinatorial clock auctions price direction and performance abstract the lack of price guidance towards efficiency relevant packages in ascending combinatorial clock auctions acca can lead to a low efficiency allocation of goods we propose a descending price combinatorial clock auction dcca with a newly devised pricing strategy to improve on this problem using agent based simulations we document that the dcca provides significant improvements over the acca and we are able to understand in which environments these improvements are likely to be the strongest we test these predictions in the laboratory with human subjects and find evidence that the dcca generates improvements in auction efficiency and revenue

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

is there evidence of pessimism and doubt in subjective distributions implications for the equity premium puzzle abel 2002 shows that pessimism and doubt in the subjective distribution of the growth rate of consumption reduce the equity premium puzzle we quantify the amount of pessimism and doubt in survey data on us consumption and income individual forecasters are in fact pessimistic but show marked overconfidence rather than doubt however the implications for abel s model depend on how the empirically heterogeneous beliefs are mapped into beliefs of a representative agent we use an arrow debreu economy to show that disagreement increases the equity premium when incorporating this in our estimation we find little empirical evidence of either overconfidence or doubt

pushing subjects beyond rationality with more alternatives in experimental auctions the use of experimental economics in valuation of market and nonmarket goods has grown over the past few years the ability of experimental auctions eus to reveal consumer preferences and their malleability has been praised in previous literature because of the high cost of conducting eus researchers usually present multiple products to participants determining how many products to present has no clear guideline the results of this study show that subjects do not value products the same way across different number of options offered to them the main indicator is the increasing variance in responses for a benchmark product when more products are available with an econometric specification allowing for heteroscedasticity as a function of the number of product offerings the results indicate that the number of goods available for bidding is not to be taken as a trivial task in experimental design for value elicitation

the spite motive in third price auctions a spiteful agent losing an auction experiences negative emotions towards the winner in line with previous experimental findings i show that the symmetric equilibrium bid of a spiteful agent in third price auctions is higher than the risk neural nash equilibrium bid furthermore it can be shown that spiteful agents bid the same way agents would who anticipate to regret their decision in equilibrium

overconfidence and excess entry an experimental approach psychological studies show that most people are overconfident about their own relative abilities and unreasonably optimistic about their futures e g shelly e taylor and j d brown 1988 neil d weinstein 1980 when assessing their position in a distribution of peers on almost any positive trait like driving ability ola svenson 1981 income prospects or longevity a vast majority of people say they are above the average although of course only half can be if the trait is symmetrically distributed this paper explores whether optimistic biases could plausibly and predictably influence economic behavior in one particular setting entry into competitive games or markets many empirical studies show that most new businesses fail within a few years for example using plant level data from the u s census of manufacturers spanning 1963 1982 timothy dunne et al 1988 estimated that 61 5 percent of all entrants exited within five years and 79 6 percent exited within 10 years most of these exits are failures see also dunne et al 1989a 1989b d shapiro and r s khemani 1987

contests with money and time experimental evidence on overbidding in all pay auctions competition for a prize frequently takes the form of dedicating time toward winning a contest those who spend more time become more likely to obtain the prize we model this competition as an all pay auction under incomplete information and report an experiment in which expenditures and rewards are in terms of time in the experiment subjects must stay in the laboratory doing nothing for an initially prespecified length of time however they can bid in terms of time to leave early the auction has an all pay structure so that if an individual does not submit the highest bid within her group she must stay for the additional time that she bid we correlate behavior in this game with behavior in an isomorphic all pay auction played with money bids we also consider how two measures of sophistication the cognitive reflection test crt score and performance on a probability calibration task correlate with behavior we find strong similarities in overall behavior between the auctions conducted with money and with time bidding greater than equilibrium levels is typical and as a consequence average earnings are negative in both auctions thus the result that there is overdissipation of rent in all pay auctions extends to competition in terms of time

an experimental investigation of the seller incentives in the epas emission trading auction the clean air act requires the epa to conduct annual auctions of emission allowances under the discriminative auction rules sellers with the lowest asking prices receive the highest bids this paper studies an inverted version of this auction in which buyers face the same incentives as sellers in the epa auction consistent with theoretical predictions buyers bid above their valuation auction outcomes are inefficient and increasing the number of buyers increases bids buyers facing human opponents compete more aggressively than the risk neutral prediction but bids do not differ systematically from this prediction when buyers face computerized nash robots copyright 1995 by american economic association

governance and contract choice theory and evidence from groundwater irrigation markets abstract this paper examines the role governance institutions play in the adoption of contracts we develop a simple model of the contracting relationship in a setting where unverifiable outcomes exist and use it to interpret data on groundwater irrigation contracts in bangladesh a distinguishing feature of this market is the variety of village level institutions which impose different degrees of punishment for contract violation consistent with the model we find households adopt contracts that rely on unverifiable outcomes which are not formally contractible when punishment for contract violation is weak conversely households adopt contracts that rely on formally contractible and verifiable outcomes when punishment is severe this evidence is consistent with contract terms being chosen optimally given what is or is not formally contractible

using laboratory experimental auctions in marketing research a case study of new packaging for fresh beef this paper illustrates the use of laboratory experimental auctions in a pretest market research program for new products we review the experimental auctions literature discuss the range of auction mechanisms available and present the advantages and disadvantages of using a particular mechanism for a laboratory pretest market we then present a step by step example of how a theoretically incentive compatible auction mechanism fifth price sealed bid was used in a laboratory pretest market for vacuum packaged beef based on the illustration we discuss the potential for using laboratory experimental auctions in pretest market research we present the limitations that may be encountered in such applications and outline research aimed at improving the behavioral properties of the technique

rationalizable bidding in first price auctions abstract we analyze the consequences of strategically sophisticated bidding without assuming equilibrium behavior in particular we characterize interim rationalizable bids in symmetric first price auctions with interdependent values and affiliated signals we show that 1 every nonzero bid below the equilibrium is rationalizable 2 some bids above the equilibrium are rationalizable 3 the upper bound on rationalizable bids of a given player is a nondecreasing function of her signal in the special case of independent signals and quasi linear valuation functions i the least upper bound on rationalizable bids is concave hence ii rationalizability implies substantial proportional shading for high valuations but is consistent with negligible proportional shading for low valuations we argue that our theoretical analysis may shed some light on experimental findings about deviations from the risk neutral nash equilibrium

estimating individual discount rates in denmark a field experiment we estimate individual discount rates with respect to time streams of money using controlled laboratory experiments these discount rates are elicited by means of field experiments involving real monetary rewards the experiments were carried out across denmark using a representative sample of 268 people between 19 and 75 years of age individual discount rates are estimated for various households differentiated by socio demographic characteristics such as income and age our conclusions are that discount rates are constant over the 12 month to 3 year horizons used in these experiments and that discount rates vary substantially with respect to several socio demographic variables hence we conclude that it would be reasonable to assume constant discount rates for specific household types but not the same rates across all households

phillips curve instability and optimal monetary policy this paper assesses the implications for optimal discretionary monetary policy if the slope of the phillips curve changes the paper first derives a phillips curve from the optimal pricing decision of a monopolistic firm that faces a changing cost of price adjustment the second aspect of the paper constructs a utility based welfare criterion a novel feature of this criterion is that is has a relative weight on output gap deviations that changes synchronously with changes in the cost of price adjustment the systematic component of the targeting rule that implements the optimal discretionary policy under the utility based criteria is constant in contrast the systematic component of the targeting rule under an ad hoc criteria changes along with changes in the slope of the phillips curve

risk attitudes in first price auction experiments a bayesian analysis non cooperative bidding theory for sealed bid auctions generally implies testable predictions that are conditioned on the risk attitudes of agents received laboratory experiments that purport to test this theory do not generally control for the risk attitudes of subjects those experiments exhibit behavior inconsistent with popular bidding models that assume that agents have the same aversion to risk or are all risk neutral this paper constructs an explicit bayesian prior distribution for the risk attitudes of experimental subjects and reconsiders the experimental results it finds that observed bidding behavior is still inconsistent with the nash predictions when explicit prior weights are attached to alternative assumptions about subject risk attitudes thus one cannot account for observed bidding anomalies by appealing to uncontrolled nuisance variables such as risk attitudes non cooperative bidding theory for sealed bid auctions generally implies testable predictions that are conditioned on the risk attitudes of agents archetypical of this result is the nash equilibrium prediction for first price auctions for an object that is valued by agents in an independent and private manner received laboratory experiments that purport to test this theory do not generally control for the risk attitudes of subjects those experiments exhibit behavior inconsistent with popular bidding models that assume that agents have the same aversion to riskor are all risk neutral in this paper we construct an explicit prior distrlbution for the risk attitudes of experimental subjects and reconsider the experimental results we find that observed bidding behavior is indeed consistent with the nash predictions when explicit prior weights are attached to alternative assumptions about subject risk aversion however when one allows for risk loving subjects as well observed behavior is inconsistent with nash predictions thus one cannot account for observed bidding anomalies by appealing to uncontrolled nuisance variables such as risk attitudes in section i we consider a specific nash equilibrium ne bidding model due to cox roberson and smith 1982 and cox smith and walker 1988 that clearly illustrates the risk sensitivity of the theoretical predictions in section ii we provide independent evidence of the risk attitudes of experimental subjects in a test for risk attitudes developed by harrison 1986a this evidence allows us to construct an explicit prior probability density function over the coefficient of constant relative risk attitudes employed in the specific bidding model of section i in section iii we reconsider the evidence from the first price fp experiments reported in cox roberson and smith 1982 and cox smith and walker 1983a 1983b i a specific bidding model cox roberson and smith 1982 hereafter crs present a model based on a power function utility specification for agent i ui y y 1 received for publication august 31 1987 revision accepted for publication december 18 1989 university of south carolina i am grateful to two anonymous referees for helpful comments although they are not responsible for my conclusions

star shaped probability weighting functions and overbidding in first price auctions there is a debate about whether risk aversion is the main source of overbidding in a first price independent private values auction as an alternative we adopt a non expected utility framework and identify an interpretable property on the probability weighting function which always induces overbidding

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

multi dimensional reference dependent preferences in sealed bid auctions how most laboratory experiments differ from the field abstract we study bidding behavior in first and second price sealed bid auctions with loss averse agents our model predicts overbidding in first price induced value auctions consistent with evidence from most laboratory experiments substantially different bidding behavior could result in commodity auctions where money and auction item are consumed along different dimensions of the consumption space differences also result in second price auctions our study thereby indicates that transferring qualitative behavioral findings from induced value laboratory experiments to the field may be problematic if subjects are loss averse