How the auction design influences procurement prices: an experiment

The targeted design of auctions has to take behavioral regularities into account. This paper explores whether procurement auction formats can take advantage of bidders' willingness-to-pay-willingness-to-accept disparity. In a laboratory experiment, we compare four different second-price auction formats for procuring a good. The four formats are a sealed-bid auction and three different descending-clock auctions. We assume that a bidder's willingness-to-accept exceeds his willingness-to-pay and that, depending on the auction format, a bidder's reference-state shifts such that the bidder's perspective moves from a willingness-to-accept perspective towards a willingness-to-pay perspective, thus inducing aggressive bids. In line with the prediction, auction prices decline across the four formats. In particular, we observe the lowest prices in those two clock auction formats that, at every auction stage, select a bidder as the current leading bidder. We conclude that mechanisms influence the reference state and that auctions that foster reference-state shifts lead to lower payments for the buyer. These results support and generalize findings on sales auctions. However, not all of our findings on procurement auctions mirror findings on sales auctions. Bidders overbid in sealed-bid procurement auctions, which does not mirror the commonly observed overbidding in sealed-bid sales auctions

Overbidding in Independant Private-Values Auctions and Misperception of Probabilities

We conduct an experiment to test whether probability misperception may be a possible alternative to risk aversion to explain overbidding in independent first-price private-values auctions. The experimental outcomes indicate that subjects underestimate their probability of winning the auction, and indeed overbid. Yet, when provided with feed-back on the precision of their predictions, subjects learn first to predict their probability of winning correctly, and second to curb-down significantly overbidding. The structural estimation of different behavioral models suggests that i) subjects are heterogenous with respect to risk preferences and probability perceptions, ii) subjects tend to best-respond to their stated beliefs, and iii) although necessary to explain fully behavior, risk aversion appears to play a lesser role than previously believed. Finally, our experimental findings are shown to be consistent with a standard theoretical auction model combining risk aversion and misperception of probabilities. Nous menons une expérience pour évaluer si le fait qu'un sujet évalue mal ses probabilités de gagner peut être une hypothèse alternative à l’aversion au risque pour expliquer les surenchères lors d'enchères indépendantes privées au premier prix. Les résultats expérimentaux montrent, en effet, que les sujets sous-estiment leurs probabilités de gagner l'enchère et ont tendance à surenchérir. Cependant, lorsqu'on leur présente plus de précisions sur leurs prédictions, les sujets apprennent d'abord à prédire correctement leurs probabilités de gagner, puis à limiter considérablement la surenchère. L'estimation de différents modèles du comportement suggère que i) les sujets sont hétérogènes par rapport à leurs préférences du risque et leurs perceptions des probabilités, ii) les sujets choisissent leur meilleure réponse conditionnellement aux croyances qu’ils révèlent, et iii) bien que nécessaire pour expliquer pleinement le comportement des sujets, l'aversion au risque semble jouer un rôle moins important que prévu. Finalement, nos résultats expérimentaux sont consistants avec un modèle théorique d'enchères standard qui combine l'aversion au risque et la mauvaise perception des probabilités.auctions, misperception of probabilities, overbidding, risk-aversion, aversion au risque, enchères, mauvaise perception des probabilités, surenchère

Knowing Me, Imagining You:

Overbidding in auctions has been attributed to e.g. risk aversion, loser regret, level-k, and cursedness, relying on varying identifying assumptions. I argue that "type projection'" organizes these findings and largely captures observed behavior. Type projection formally models that people tend to believe others have object values similar to their own - a robust psychological phenomenon that naturally applies to auctions. First, I show that type projection generates the main behavioral phenomena observed in auctions, including increased sense of competition ("loser regret") and broken Bayesian updating ("cursedness"). Second, re-analyzing data from seven experiments, I show that type projection explains the stylized facts of behavior across private and common value auctions. Third, in a structural analysis relaxing the identifying assumptions made in earlier studies, type projection consistently captures behavior best, in-sample and out-of-sample. The results reconcile bidding patterns across conditions and have implications for behavioral and empirical analyses as well as policy

Circuit breakers with uncertainty about the presence of informed agents: I know what you know . . . I think

This study conducts experimental asset markets to examine the effects of circuit breaker rules on market behavior when agents are uncertain about the presence of private information. Our results unequivocally indicate that circuit breakers fail to temper unwarranted price movements in periods without private information. Agents appear to mistakenly infer that others possess private information, causing price to move away from fundamental value. Allocative efficiencies in our markets are high across all regimes. Circuit breakers perform no useful function in our experimental asset markets.Markets ; Financial markets ; Risk

Endogenous Barriers to Learning

Motivated by the idea that lack of experience is a source of errors but that experience should reduce them, we model agents' behavior using a stochastic choice model, leaving endogenous the accuracy of their choice. In some games, increased accuracy is conducive to unstable best-response dynamics. We define the barrier to learning as the minimum level of noise which keeps the best-response dynamic stable. Using logit Quantal Response, this defines a limitQR Equilibrium. We apply the concept to centipede, travelers' dilemma, and 11-20 money-request games and to first-price and all-pay auctions, and discuss the role of strategy restrictions in reducing or amplifying barriers to learning.Comment: 26 pages, 15 figure

In Bargaining We Trust

We introduce trustworthy traders in bilateral trading. Trustworthy traders do not misrepresent their private information. We prove that an increase in the levels of trust (probabilities that traders are trustworthy) can reduce the maximum attainable probability of trade among the strategic traders in the set of k-double auctions. In contrast, if the levels of trust increase, then we can construct direct mechanisms with a higher probability of trade among the strategic traders. In fact, there exist ex-post efficient direct mechanisms if the levels of trust are high but k-double auctions are inefficient for all levels of trust. We prove that k-double auctions are constraint-inefficient for generic levels of trust when players have uniform priors.microeconomics ;

Knowing me, imagining you: Projection and overbidding in auctions

Overbidding in auctions has been attributed to risk aversion, loser regret, level-k, and cursedness, though relying on different identifying assumptions. I argue that "type projection" organizes these findings and better captures observed behavior. Type projection formally models that people tend to believe others have object values similar to their own -- a robust psychological phenomenon that naturally applies to auctions. First, I show that type projection implies the main behavioral phenomena in auctions, including increased sense of competition (like loser regret) and broken Bayesian updating (like cursedness). Second, re-analyzing data from seven experiments, I show that type projection explains the stylized facts of behavior across private and common value auctions. Third, in a structural analysis nesting existing approaches and emphasizing robustness, type projection consistently captures behavior best, in-sample and out-of-sample. The results reconcile bidding patterns across conditions and have implications for behavioral and empirical analyses as well as policy

Adversarial risk analysis for first-price sealed-bid auctions

First-price sealed-bid (FPSB) auctions have mostly been modelled in auction theory using the decision-theoretic and Bayesian game-theoretic approaches. From a practical point of view, each approach has its limitations. To overcome those limitations, Rios Insua et al. (2009) introduced an approach, called adversarial risk analysis (ARA) that provides an optimal solution for one of the intervening agents, based on a decision making problem in hand and treating the intelligent adversaries' decisions as uncertainties. ARA solutions for FPSB auctions have previously been found but only under strong assumptions which make the model somewhat unrealistic. In this thesis, we use ARA methodology and model bidders' behaviours in FPSB auctions using more realistic assumptions. First, we model bidders' behaviours by defining a new utility function that considers bidders' wealth which is assumed to be different for each bidder. We consider bidders' wealth since it is a significant determinant of their bidding behaviour in these auctions. Also, we define new risk behaviour parameters that change with the relative change in circumstances of bidders' wealth. In our modelling, we assume that the auctioned item is normal and has a reserve price which is known in advance to each bidder. We find ARA solutions not only for risk-neutral but also for risk-averse as well as risk-seeking bidders. We model these auctions by ARA framework using non-strategic play, level-k thinking, mirror equilibrium (ME) and Bayes Nash equilibrium (BNE) solution concepts. Finding ARA solutions using non-strategic play and level-k thinking, ME and BNE (asymmetric case) solution concepts, we assume two bidders. Whereas, we assume n bidders while finding ARA solutions using BNE symmetric case. Second, we use ARA methodology and model bidders' behaviours using the utility function that takes into account bidders' winning and losing regret for the auctioned item. We define new winning and losing regret parameters and a modified utility function in order to take into account the effect of bidders' wealth on their bidding behaviours. Using the modified utility function, we find ARA solutions using non-strategic play and level-k thinking solution concepts assuming n bidders participating in these auctions. We give numerical examples to illustrate our methodology

The New Keynesian Microfoundations of Macroeconomics

New Keynesian Macroeconomics (NKM) obeys to the new dogma that macroeconomics should be firmly grounded in First Principles of micro theory. Households are assumed to run an intertemporal optimization calculus with respect to leisure and consumption by making use of perfect financial markets. The supply side is organized so that full employment prevails. Macroeconomic coordination problems between saving and investment are absent. In order to make model predictions more compatible with empirical facts, NKM chooses "ad hoc" microfoundations: utility functions and market structures are designed arbitrarily to allow for persistence of macro variables. NKM's reduced hybrid macro model, with lags and expectational leads, is a useful "work horse", compatible with various micro reasoning. However, NKM's insistence on the representative agent obstructs an understanding of heterogeneous beliefs and learning.Representative Agent, Ramsey Saving, Calvo Pricing, Sticky Information, Rational Expectations, Heterogeneous Beliefs