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An experiment on auctions with endogenous budget constraints

Published online by Cambridge University Press:  14 March 2025

Lawrence M. Ausubel ,
Justin E. Burkett  and
Emel Filiz-Ozbay
Lawrence M. Ausubel*
Affiliation:
Department of Economics, University of Maryland, Tydings Hall, College Park, MD 20742, USA
Justin E. Burkett*
Affiliation:
Department of Economics, Wake Forest University, Box 7505, Winston-Salem, NC 27109, USA
Emel Filiz-Ozbay*
Affiliation:
Department of Economics, University of Maryland, Tydings Hall, College Park, MD 20742, USA
*
[email protected]
[email protected]
[email protected]
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Abstract

We perform laboratory experiments comparing auctions with endogenous budget constraints. A principal imposes a budget limit on a bidder (an agent) in response to a principal-agent problem. In contrast to the existing literature where budget constraints are exogenous, this theory predicts that tighter constraints will be imposed in first-price auctions than in second-price auctions, tending to offset any advantages attributable to the lower bidding strategy of the first-price auction. Our experimental findings support this theory: principals are found to set significantly lower budgets in first-price auctions. The result holds robustly, whether the principal chooses a budget for human bidders or computerized bidders. We further show that the empirical revenue difference between first- and second-price formats persists with and without budget constraints.

Keywords

AuctionsEndogenous budget constraintPrincipal-agent problem

JEL classification

D44: Auctions C91: Laboratory, Individual Behavior
Type
Original Paper
Information
Experimental Economics , Volume 20 , Issue 4 , December 2017 , pp. 973 - 1006
Copyright
Copyright © 2017 Economic Science Association

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Footnotes

Electronic supplementary material The online version of this article (doi:https://doi.org/10.1007/s10683-017-9520-9) contains supplementary material, which is available to authorized users.

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Instructions for First-Price Sealed-Bid Auctions”
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