, Volume 17, Issue 1, pp 100-128
Date: 01 May 2013

Valuation structure in first-price and least-revenue auctions: an experimental investigation

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Abstract

In many auctions the valuation structure involves both private and common value elements. Existing experimental evidence (e.g. Goeree and Offerman in Am. Econ. Rev. 92(3):625–643, 2002) demonstrates that first-price auctions with this valuation structure tend to be inefficient, and inexperienced subjects tend to bid above the break-even bidding threshold. In this paper, we compare first-price auctions with an alternative auction mechanism: the least-revenue auction. This auction mechanism shifts the risk regarding the common value of the good to the auctioneer. Such a shift is desirable when ex post negative payoffs for the winning bidder results in unfulfilled contracts, as is often the case in infrastructure concessions contracts. We directly compare these two auction formats within two valuation structures: (1) pure common value and (2) common value with a private cost. We find that, relative to first-price auctions, bidding above the break-even bidding threshold is significantly less prevalent in least-revenue auctions regardless of valuation structure. As a result, revenue in first-price auctions is higher than in least-revenue auctions, contrary to theory. Further, when there are private and common value components, least-revenue auctions are significantly more efficient than first-price auctions.

Financial support from Gettysburg College and the Facultad de Ciencias Económicas at Universidad Francisco Marroquín is gratefully acknowledged. Thanks to Pedro Monzón and Diego Fernandez for outstanding research assistance. We have benefited from comments and suggestions from participants in seminars at Chapman University, Universidad Francisco Marroquín, George Mason University, the Alhambra Experimental Workshop, the 2010 North-American ESA conference in Tuscon Arizona, the Eastern Economic Association 37th annual conference in New York City and the Sydney Experimental Seminar at UNSW. We also thank the editor and two anonymous referees for many valuable comments and suggestions.