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Common Value Auctions with Default: An Experimental Approach

Published online by Cambridge University Press:  14 March 2025

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

Keywords

common value auctionwinner's cursedefaultlimited liabilityexperimental economics

JEL classification

D44: Auctions C90: General L14: Transactional Relationships • Contracts and Reputation • Networks
Type
Research Article
Information
Experimental Economics , Volume 5 , Issue 3 , December 2002 , pp. 233 - 252
Copyright
Copyright © 2002 Economic Science Association

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