A Survey-Based Procedure for Measuring Uncertainty or Heterogeneous Preferences in Markets, with Application to a New Test for Common Values
Posted: 12 Feb 2008 Last revised: 7 Mar 2008
Date Written: January 24, 2008
The effects of heterogeneous preferences or uncertainty about item values on the variance of dependent variables (e.g., auction prices; retail price dispersion; or investment choices in stocks, R&D, or education) are usually relegated to the error term, which a) confounds these effects with other drivers of the error term and b) could lead to heteroskedasticity at best or omitted variable bias at worst. This paper shows how surveys can generate a measure of the amount of information or heterogeneity of preferences in a market by measuring the distribution of private information signals in eBay online auctions for computers. Regressions utlizing this measure produce significantly different results than those that rely on hedonic measures to control for heterogeneity alone. Furthermore, this measure provides a new way to test for the presence of a common values component in auctions.
Keywords: surveys, auctions, heterogeneity, preferences, uncertainty, distribution, hedonic, information, common values, private values, bidders
JEL Classification: C42, C81, D44, D8, D82, L15
Suggested Citation: Suggested Citation