Experimental Economics

, Volume 17, Issue 1, pp 100–128

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

Authors

  • Diego Aycinena
    • Centro Vernon Smith de Economía ExperimentalUniversidad Francisco Marroquín
  • Rimvydas Baltaduonis
    • Department of EconomicsGettysburg College
    • Centro Vernon Smith de Economía ExperimentalUniversidad Francisco Marroquín
Manuscript

DOI: 10.1007/s10683-013-9359-7

Cite this article as:
Aycinena, D., Baltaduonis, R. & Rentschler, L. Exp Econ (2014) 17: 100. doi:10.1007/s10683-013-9359-7

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.

Keywords

AuctionsWinner’s curseAllocative efficiencyBidding

JEL Classification

D44C72

Supplementary material

10683_2013_9359_MOESM1_ESM.pdf (264 kb)
(PDF 264 kB)

Copyright information

© Economic Science Association 2013