Winner's Curse: Theory and Experiments

GSIA Working Paper

55 Pages Posted: 24 Jan 2003

See all articles by Vesna Prasnikar

Vesna Prasnikar

Jozef Stefan Institute

Christine A. Parlour

University of California, Berkeley - Finance Group

Uday Rajan

Stephen M. Ross School of Business, University of Michigan

Date Written: December 2002

Abstract

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

Prasnikar, Vesna and Parlour, Christine A. and Rajan, Uday, Winner's Curse: Theory and Experiments (December 2002). GSIA Working Paper, Available at SSRN: https://ssrn.com/abstract=365221 or http://dx.doi.org/10.2139/ssrn.365221

Vesna Prasnikar

Jozef Stefan Institute

Jamova cesta 39
Ljubljana, 1000
Slovenia

Christine A. Parlour (Contact Author)

University of California, Berkeley - Finance Group ( email )

Haas School of Business
545 Student Services Building
Berkeley, CA 94720
United States
510-643-9391 (Phone)

Uday Rajan

Stephen M. Ross School of Business, University of Michigan ( email )

701 Tappan Street
Ann Arbor, MI 48109
United States
734-764-2310 (Phone)

HOME PAGE: http://webuser.bus.umich.edu/urajan

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