An Externality-Robust Auction: Theory and Experimental Evidence

University of Zurich, Department of Economics, Working Paper No. 153

37 Pages Posted: 18 Apr 2014 Last revised: 28 Apr 2016

See all articles by Björn Bartling

Björn Bartling

University of Zurich - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Nick Netzer

University of Zurich

Multiple version iconThere are 3 versions of this paper

Date Written: April 2016

Abstract

Behavioral robustness is essential in mechanism design. Existing papers focus on robustness as captured by dominant strategies. This paper studies the novel concept of externality-robustness, which addresses players’ motives to affect other players’ monetary payoffs. One example is externalities due to spite, which has been used to explain overbidding in second-price auctions. We show theoretically and experimentally that a trade-off exists between dominant-strategy implementation and externality-robust implementation. In particular, we derive the externality-robust counterpart of the second-price auction. Our experiments replicate the earlier finding of overbidding in the second-price auction, but we find that average bids equal value in the externality-robust auction. Our data also reveal that both auctions produce the same level of efficiency, suggesting that both dimensions of robustness are equally important. Our results are relevant for mechanism design in general, because the concept of externality-robustness is applicable to arbitrary mechanism design problems.

Keywords: Robust mechanism design, spiteful preferences, experimental auctions

JEL Classification: C91, D03, D44, D82

Suggested Citation

Bartling, Björn and Netzer, Nick, An Externality-Robust Auction: Theory and Experimental Evidence (April 2016). University of Zurich, Department of Economics, Working Paper No. 153, Available at SSRN: https://ssrn.com/abstract=2425708 or http://dx.doi.org/10.2139/ssrn.2425708

Björn Bartling (Contact Author)

University of Zurich - Department of Economics ( email )

Zuerich, 8006
Switzerland

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Nick Netzer

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

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