MICRO/THEORY: Decomposing the Winner’s Curse; Professor Emmanuel Vespa (UC San Diego)

Abstract

One of the most prominent and most studied results in the common value auctions literature is the winner’s curse: The fact that in auctions where each bidder has noisy information about the shared value of the object, the bidder who wins the auction often incurs a loss. There is a vast literature documenting its ubiquity and robustness. While experiments have been very successful in proving that individuals, even when experienced and sophisticated, fall prey to the winner’s curse, it is largely an open question why individuals do so. Given the lack of empirical evidence on mechanisms, behavioral economists have provided a variety of theories. In this paper, we aim to provide the missing evidence on mechanisms. Namely, how important is each of the behavioral deviations from Nash equilibrium, how much do they contribute, and perhaps are there large parts that still need a new model? This type of experimental evidence can help refine behavioral theory and is crucial if we want to understand which tools will help individuals navigate economic situations and potentially help them make better decisions.