Winner's Curse: Theory and Experiments
GSIA Working Paper
55 Pages Posted: 24 Jan 2003
Date Written: December 2002
We conduct experiments on common value auctions with rationing. In each auction, the good is randomly allocated to each of the k highest bidders, at the (k+1)st highest price. As the degree of rationing increases, the theoretical winner's curse decreases, and the equilibrium bid function increases. Experimentally, we find that bidders suffer from the winner's curse, and lose money on average. However, the bids in the experiments do adjust in the appropriate direction as the degree of rationing changes, providing support for the comparative statics implications of the theory. We demonstrate the connection between the experimental results and a theoretical measure of the winner's curse. Our results are consistent with subjects having an intuitive understanding of the winner's curse, but being unable to compute the equilibrium bid levels.
Keywords: Experiments, rationing, common value auctions
JEL Classification: D44, C92
Suggested Citation: Suggested Citation