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Common Value Auctions with Default: An Experimental Approach

Published online by Cambridge University Press:  14 March 2025

Matthew R. Roelofs*
Affiliation:
Department of Economics, Western Washington University, Bellingham, WA 98225-9074

Abstract

This paper examines a common value auction in which bidder default is explicitly allowed. The lack of contractual enforcement has implications for the formation of bids as well as the revenue properties of the auction. Using a common value procurement auction, we explore these implications in an experimental setting. Our results show that bidders are more aggressive when default is allowed. A theoretical result shows that allowing default can actually be in the best interest of the auctioneer. Experimental evidence, however, indicates that this result does not hold true in practice. One possible reason for this discrepancy is that the data in our experiments is consistent with winner's curse behavior.

Type
Research Article
Copyright
Copyright © 2002 Economic Science Association

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