Biasing Auction

49 Pages Posted: 8 Jan 2009

See all articles by E. Glen Weyl

E. Glen Weyl

Microsoft Research New York City; RadicalxChange Foundation

Date Written: April 10, 2006

Abstract

Bidders' psychological biases can have important effects on behavior in auctions and the principles of auction design. I consider two potential sources of the winner's curse in common values auctions. The first, overconfidence, is here defined for the first time in a fully general, distribution free manner by bidders believing their signals are more informative than they really are. The other bias, disregard, is intended to capture the spirit of an alternative explanation of the winner's curse proposed by Eyster and Rabin (2006) and is present when bidders underestimate the informativeness of other bidders' signals. When the value of the object is normally distributed, the two hypotheses can be formulated in an intuitive manner. Both explain the winner's curse, but they offer sharply different predictions about bidder behavior and prescriptions for auction design. When bidders are very overconfident, the first-price auction is revenue preferred to the second-price auction. Furthermore, even when the effects are relatively mild, they can reverse Milgrom and Weber (1982)'s Disclosure Principle as it can be optimal for auctioneers to induce speculation.

Keywords: auctions, overconfidence, winner's curse

JEL Classification: D44

Suggested Citation

Weyl, Eric Glen, Biasing Auction (April 10, 2006). Available at SSRN: https://ssrn.com/abstract=1324365 or http://dx.doi.org/10.2139/ssrn.1324365

Eric Glen Weyl (Contact Author)

Microsoft Research New York City ( email )

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HOME PAGE: http://www.glenweyl.com

RadicalxChange Foundation ( email )

HOME PAGE: http://www.radicalxchange.org

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