Empirical Relevance of Ambiguity in First-Price Auctions

63 Pages Posted: 7 Mar 2016 Last revised: 8 Jul 2017

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: June 30, 2017

Abstract

We study the identification and estimation of first-price auctions with independent private values if 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 lower envelope of the bidders’ set of priors. We extend the identification result to allow for constant relative risk aversion and unobserved auction heterogeneity that can be correlated with the number of bidders. We propose a flexible Bayesian estimation method based on Bernstein polynomials, and our Monte Carlo experiments show that the method estimates the parameters precisely and chooses reserve prices with nearly maximal revenues – whether there is ambiguity or not. Incorrectly assuming no ambiguity may induce estimation bias and loss of revenue. We apply our method to a sample of U.S. timber auctions and find evidence of ambiguity in auctions from the Pacific Northwest region.

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 (June 30, 2017). 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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