Empirical Relevance of Ambiguity in First-Price Auctions

63 Pages Posted: 7 Mar 2016 Last revised: 12 May 2018

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

Government of Canada - Bank of Canada

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. Using variation in the number of bidders we nonparametrically identify the true valuation distribution and the lower envelope of the set of prior beliefs. We also allow for CRRA and unobserved auction heterogeneity, and propose a Bayesian estimation method based on Bernstein polynomials. Monte Carlo experiments show that our estimator performs well, and incorrectly ignoring ambiguity induces bias and loss of revenue. We find evidence of ambiguity in timber auctions in the Pacific Northwest.

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). Journal of Econometrics, 2018, DOI: 10.1016/j.jeconom.2018.02.001. 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

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

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