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We develop and experimentally test a model of endogenous entry, exit, and bidding in common value auctions. The model and experimental design include an alternative profitable activity (a “safe havenâ€) that provides agent-specific opportunity costs of bidding in the auction. Each agent chooses whether to accept the safe haven income or forgo it...
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... all subjects were ready, the experimenter instructed them to enter their names, social security numbers, and telephone numbers into their computers and to begin reading the instructions on their computer screens. Most experiments were run in 3-2-1 sets as portrayed in figure 1. First, 3 experiments with 3 separate groups of inexperienced subjects were run, all with the same design parameters. ...
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... In the twelve rounds of the SGE treatment with the possibility of stage 2, subjects experience each endowment-probability combination once. The order of the combinations was randomly determined for the first session and then copied for all following sessions-the "pseudo-random" approach (see Cox et al. 2001 andShafran 2018). To incentivize subjects to pay close attention in each round, it was announced that final earnings were determined from one randomly selected round. ...
Given the lack of progress on climate change mitigation, some scientists have proposed solar geoengineering as a means to manage climate change at least temporarily. One main concern with such a risky technological solution, however, is that it may create a “moral hazard” problem by crowding out efforts to reduce emissions. We investigate the potential for a risky technological solution to crowd out mitigation with theory and experiments. In a collective-risk social dilemma, players strategically act to cooperate when there is an opportunity to deploy a risky technology to help protect themselves from impending damages. In contrast to the moral hazard conjecture, the empirical results suggest that the threat of solar geoengineering can lead to an increase in cooperative behavior.
... To avoid order effects, that same random order of the 30 periods was used in all subsequent sessions. This use of a 'pseudo-random feed' has been standard in lab experiments with random effects; see, for example, Cox et al. (2001) or Kroll and Shafran (2018). ...
Using a threshold public good experiment we examine how varying degrees of inequality in resources and differences in risk of loss among players affect the success of group efforts to avoid a common loss. We find that when the poor face greater risk than the rich, contributions and success in reaching the threshold decrease with increasing inequality in funds available. This occurs not because the poor do not make a greater effort when they face higher risk but rather because the rich, who control most of the resources, tend to lower their contributions when they face the lower risk, and because a subset of the rich are not averse to inequality. These results highlight the challenges confronting parties in real-world situations, such as forest communities threatened by wildfire or countries confronting climate change, where group efforts are necessary if losses are to be avoided and the parties differ widely in available resources and in the risks they face.
... 6 Technically, the random number was not determined in the session itself; rather, all 900 numbers (18 subjects in a session times 50 rounds) were randomly determined before the first session in order to avoid behavioral differences between sessions due to differences in how bad outcomes were generated. This use of a "pseudo-random feed" has been standard in lab experiments with random effects; see, for example,Cox et al. (2001).Content courtesy of Springer Nature, terms of use apply. Rights reserved. ...
Individuals regularly invest in self-protection to reduce the risk of an adverse event. The effectiveness of self-protection often depends on the actions of other economic agents and can be modeled as a stochastic coordination game with multiple Pareto-ranked equilibria. We use lab experiments to analyze tacit coordination in stochastic games with two kinds of interdependencies in payoffs: “non-spatial” in which every agent’s action has an impact on the risk faced by every other agent, and “spatial” in which agents only impact the risk faced by their immediate neighbors. We also compare behavior in the stochastic games to deterministic versions of the same games. We find that coordination on the payoff-dominant equilibrium is significantly easier in the deterministic games than in the stochastic games and that spatial interdependencies lead to greater levels of coordination in the deterministic game but not in the stochastic game. The difficulty with coordination observed in the stochastic games has important implications for many real-world examples of interdependent security and also illustrates the importance of not relying on data from deterministic experiments to analyze behavior in settings with risk.
... Later, Coase (1959) developed the property rights approach to spectrum assignment. 11 Cox et al. (2001) experimentally test for endogenous entry in common value auctions. They posit the existence of reservation opportunity costs (expected profit from entering an auction). ...
This article examined the empirical relationship between prices paid for national 3G wireless licenses when spectrums were sold by auction. The reduced-form modelling approach was based on the premise that auction design features can, and do, affect both final (revenue) and intermediate (viz., auction competitiveness and license assignment) auction outcomes. Importantly, the analysis recognizes, and explicitly allows for, the endogeneity of bidder entry and sample selection arising from an absence of bidding. Generally, these key features have only received attention in isolation. In particular, the study addressed the principal question of: which regulator chosen auction design variables determine prices paid in spectrum auctions? The analysis showed that flexible-package formats increased prices paid, and that higher reserve prices had a dampening effect. The article also showed that longer license terms and more competitive auctions (as measured by the bidders-to-licenses ratio) enhance prices paid.
... In short, the winner's curse was alive and well even after our best efforts to establish an environment that would correct for the objections of most mainstream economists. These results, "the usual disaster", have since been replicated by others under similar conditions (Lind and Plott, 1991;Cox, Dinkin, and Swarthout, 2001). 5 ...
... 5 Considering the value to seller of an unsold asset to be 0 is, as usual, a harmless normalization. It bears emphasis, however, that failing to meet the reserve price implies that the seller is irrevocably constrained from ever o¤ering this asset to this set of potential bidders in the future (this assumption is nearly ubiquitous in auction theory, though seldom mentioned). ...
Potential bidders respond to a seller’s choice of auction mechanism for a common-value or affiliated-values asset by endogenous decisions whether to incur an information-acquisition cost (and observe a private estimate), or forgo competing. Privately informed participants decide whether to incur a bid-preparation cost and pay an entry fee, or cease competing. Auction rules and information flows are quite general; participation decisions may be simultaneous or sequential. The resulting revenue identity for any auction mechanism implies that optimal auctions are allocatively efficient; a nontrivial reserve price is revenue-inferior. Optimal auctions are otherwise contentless: any auction that sells without reserve becomes optimal by adjusting any one of the continuous, spanning parameters, e.g., the entry fee. Seller’s surplus-extracting tools are now substitutes, not complements. Many econometric studies of auction markets are seen to be flawed in their identification of the number of bidders.
... Bajari and Hortaçsu (2003) support the supposition of Levin and Smith (1994) by analyzing eBay auctions based on a common value modeling approach. Experimental tests of endogeneity in common value auctions have shown that, as bidders evaluate their heterogeneous opportunity costs of entry, increasing expected profits in the auction invite entry thus increasing the size of the market (Cox et al., 2001). ...
The primary pro-competitive justification for multiple principals to hire a common bidding agent is efficiency. The efficiency gained by doing so increases the advantage of the common bidding agent. Almost common value auction theory predicts that an advantaged bidder is able to reduce competition by credibly enhancing the ‘winner’s curse’ of disadvantaged rivals. The credible threat results in disadvantaged rivals exiting the bidding process early, leaving the advantaged bidder to purchase most, if not all, units at lower prices than when rivals have common values. The results of our empirical study of a common bidding agent are consistent with this theory.
... There have been experiments which have studied entry costs and biding behavior in auctions, mostly through private value auctions (see Phillips et al. (1991), Palfrey and Pevnitskaya (2008)). In a format closer to ours, Cox et al. (2001) look at entry, exit and bidding behavior through first price common value auction. But unlike our experimental design, they have an incomplete information common value auction with private signals in order to investigate winner's curse and we study second price auction as well. ...
Discussion paper In numerous auction settings potential bidders incur costs to enter the auction. Such costs may potentially influence bidder’s behavior subsequently. In this paper we experimentally study the effect of entry costs on bidding and entry behavior, through a complete information common value auction. We run first and second price auctions both with and without entry costs. We find that with entry costs, players on average bid lower in first price auctions, while in second price auctions the average bids are higher, compared to bids in the corresponding no entry fee auctions.
... In general, research has found that inexperienced bidders are more likely to overbid, as compared to experienced bidders. Experienced bidders, on the other hand, are more likely to make adjustments or exit when prices rise above the item's market value (Kagel and Levin 1986, Cox et al. 2001). ...
Given large numbers of buyers and sellers, with access to a wide variety of information, economic theory suggests that online
auction markets should provide an efficient mechanism for establishing equilibrium prices. Previous research on online auction
prices, however, is far from conclusive, having produced mixed findings. The seemingly inconsistent and sometimes contradictory
results make it very difficult to integrate empirical findings into a coherent body of knowledge. The purpose of this paper
is to present a framework that can reconcile previous findings and provide direction for future research. Accordingly, we
propose a simple theoretical framework with two dimensions—market structure (thick vs. thin) and quality uncertainty (high
vs. low). By examining the literature in the context of market structure and quality uncertainty we find that previous studies
are not necessarily at odds, but that there is actually a fairly consistent pattern of results.
... It is therefore useful to test behavior in a simpler environment where we can observe an individual's decision process in isolation, rather than as 8 Obviously, there are some exceptions. A notable one is Cox, Dinkin, and Swarthout (2001), who argue that free entry and exit will cure the problem. In their work they show that only a subset of potential bidders chose to participate in such a CV auction (participation was costly), while the worse offenders choose to stay out. ...
The Winner's Curse (WC) is a robust and persistent deviation from theoretical predictions established in experimental economics and claimed to exist in field environments. Recent attempts to reconcile such deviation include "cursed equilibrium" and level-k reasoning. We design and implement a simplified version of the Acquiring-a-Company game that transformed the game to an individual-choice problem that still retains the adverse-selection problem. We further simplified the problem so that simple ordinal reasoning could replace both Bayesian updating and contingent thinking. Our results suggest that the WC reflects bounded rationality in that people have difficulties performing contingent reasoning on future events. (JEL D81, D82)
