Uncertainty Paradox: Why You Should (Not) Lie

Abstract

When the number of bidders need not be revealed, the auctioneer may consider overreporting the number of bidders to increase revenue. However, we show that overreporting lowers revenue if misreporting induces uncertainty about the number of bidders. That is, seemingly profitable misreporting can be unprofitable when misreporting leads to uncertainty, which we call an Uncertainty Paradox. We also introduce the impact procurement, where a bidder's cost is a unit cost multiplied by the impact function. Unlike auctions, the procurer may prefer uncertainty, and the incentive to misreport increases with the impact, and in the limit, uncertainty "disappears."

Keywords: uncertainty, impact procurement, discount auction, risk aversion, incorrect belief, shill bidding

JEL Classification: D44, D81, H57