Empirical Relevance of Ambiguity in First-Price Auctions

43 Pages Posted: 7 Mar 2016  

Gaurab Aryal

University of Virginia - Department of Economics

Serafin Grundl

Board of Governors of the Federal Reserve System

Dong-Hyuk Kim

Vanderbilt University - College of Arts and Science - Department of Economics

Yu Zhu

University of Leicester

Date Written: March 4, 2016

Abstract

We study the identification and estimation of a first price auction model in which bidders face ambiguity about the valuation distribution and have maxmin expected utility. We exploit variation in the number of bidders to nonparametrically identify the true valuation distribution and the most pessimistic distribution in the biddersā€™ set of prior distributions. The identification result is extended to allow for constant relative risk aversion and separable unobserved auction heterogeneity that can be correlated with the number of bidders. We propose a flexible Bayesian estimation method based on Bernstein polynomials. Monte Carlo experiments show that our method estimates parameters precisely and chooses the reserve prices with (nearly) maximal revenues ā€“ whether there is ambiguity or not. Incorrectly assuming no ambiguity may, however, induce estimation bias, which can lead to a suboptimal reserve price and substantial revenue loss. We apply our method to a sample of U.S. timber auctions and find evidence of ambiguity.

Keywords: first-price auction, identification, ambiguity aversion, maxmin expected utility, Bayesian estimation

JEL Classification: C11, C44, D44

Suggested Citation

Aryal, Gaurab and Grundl, Serafin and Kim, Dong-Hyuk and Zhu, Yu, Empirical Relevance of Ambiguity in First-Price Auctions (March 4, 2016). Available at SSRN: https://ssrn.com/abstract=2742704 or http://dx.doi.org/10.2139/ssrn.2742704

Gaurab Aryal (Contact Author)

University of Virginia - Department of Economics ( email )

P.O. Box 400182
Charlottesville, VA 22904-4182
United States

Serafin Grundl

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Dong-Hyuk Kim

Vanderbilt University - College of Arts and Science - Department of Economics ( email )

Box 1819 Station B
Nashville, TN 37235
United States

Yu Zhu

University of Leicester ( email )

University Road
Leicester, LE1 7RH
United Kingdom

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