Skip to main content
SpringerLink
Log in

The winner’s curse in auctions with losses

  • Published:
Mind & Society Aims and scope Submit manuscript

Abstract

The winner’s curse in auctions might emerge from asymmetric information and/or from some willingness to pay for winning. This article is based on a sealed-bid common value first price auction, with a net loss for the subject with the second highest bid. The results show the existence of a trade-off between the magnitude of the potential loss and the willingness to pay for the victory. In the context of public procurement these results suggest that companies are willing to overpay small contracts to gain a sort of ‘free advertising’, whereas this is not the case when the contracts are large.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2

Similar content being viewed by others

Notes

  1. Hendricks et al. (2008), p. 1034.

  2. Goeree and Offerman (2003), p. 625.

  3. Other scholars (see for example Amaral et al. 2009; Boehm and Olaya 2006) have been concerned with the winner’s curse and its effects on public procurement. However, they all have proposed reforms to the existing regulation to solve the problem.

  4. Van der Bos et al. (2008), p. 483.

  5. Twenty euro is not a large amount of money in absolute terms. However, with respect to the aims of this paper (i.e. considering the nature of the experimental subjects), the difference between €1 and €20 is large enough to be significant, as will be clear from Sect. 2.

  6. Although escalation in Shubik’s auction is likely to be engendered by the particular mechanism of that auction, there is no clear evidence to discard this possibility when other mechanisms are used. Therefore, a sealed-bid auction seems the cleanest design as possible for the aims of this article.

  7. Each subject was given a paper with a number and a numbered envelope. They had to keep the paper with the number, which constituted the only identification for the experimenter.

  8. Notice that, in principle, there is no reason why the loss should be larger in the second than in the first auction. Should all the subjects bid less than €1 in the second, whereas should somebody bid more than €1 in the first, the potential loss would be larger in the first than in the second treatment.

References

  • Amaral M, Saussier S, Yvrand-Billon A (2009) Auction procedures and competition in public services: the case of urban public transport in France and London. Util Policy 17:166–175

    Article  Google Scholar 

  • Athias L, Nuñez A (2008) Winner’s curse in toll road concessions. Econ Lett 101:172–174

    Article  Google Scholar 

  • Bajari P, Hortaçsu A (2003) The winner’s curse, reserve prices and endogenous entry: empirical insights from eBay Auctions. RAND J Econ 34:329–355

    Article  Google Scholar 

  • Ball SB, Bazerman MH, Carroll JS (1991) An evaluation of learning in the bilateral winner’s curse. Organ Behav Hum Decis 48:1–22

    Article  Google Scholar 

  • Bazerman MH, Samuelson WS (1983) I won the auction but don’t want the prize. J Confl Resolut 27:618–634

    Article  Google Scholar 

  • Boehm F, Olaya J (2006) Corruption in public contracting auctions: the role of transparency in the bidding processes. Ann Public Coop Econ 77:431–452

    Article  Google Scholar 

  • Borghans L, Heckman JJ, Golsteyn BHH, Meijers H (2009) Gender differences in risk aversion and ambiguity aversion. J Eur Econ Assoc 7:649–658

    Article  Google Scholar 

  • Bowman D, Minehart D, Rabin M (1999) Loss aversion in a consumption–savings model. J Econ Behav Organ 38:155–178

    Article  Google Scholar 

  • Broecker T (1990) Credit-worthiness tests and interbank competition. Econometrica 58:429–452

    Article  Google Scholar 

  • Charness G, Levin D (2009) The origin of the winner’s curse: a laboratory study. Am Econ J Microecon 1:207–236

    Article  Google Scholar 

  • Che Y-K, Gale I (1996) Expected revenue of all-pay auctions and first-price sealed-bid auctions with budget constraints. Econ Lett 50:373–379

    Article  Google Scholar 

  • Chowdhry B, Sherman A (1996) The winner’s curse and international methods of allocating initial public offerings. Pac Basin Financ J 4:15–30

    Article  Google Scholar 

  • Chrisman JJ, Memili E, Misra K (2014) Nonfamily managers, family firms, and winner’s curse: the influence of noneconomic goals and bounded rationality. Entrep Theory Pract 38:1103–1127

    Article  Google Scholar 

  • Cramton P (1998) Ascending auctions. Eur Econ Rev 42:745–756

    Article  Google Scholar 

  • Croson R, Gneezy U (2009) Gender differences in preferences. J Econ Lit 47:448–474

    Article  Google Scholar 

  • Foreman P, Murnighan JK (1996) Learning to avoid the winner’s curse. Organ Behav Hum Decis 67:170–180

    Article  Google Scholar 

  • Fraser-Mackenzie P, Sung M-C, Johnson JEV (2015) The prospect of a perfect ending: loss aversion and the round-number bias. Organ Behav Hum Decis 131:67–80

    Article  Google Scholar 

  • Gneezy U, Smorodinsky R (2006) All-pay auctions. An experimental study. J Econ Behav Organ 61:255–275

    Article  Google Scholar 

  • Goeree JK, Offerman T (2003) Winner’s curse without overbidding. Eur Econ Rev 47:625–644

    Article  Google Scholar 

  • Goetzmann WN, Spiegel M (1995) Private value components, and the winner’s curse in an art index. Eur Econ Rev 39:549–555

    Article  Google Scholar 

  • Ham JC, Kagel JH (2006) Gender effects in private value auctions. Econ Lett 92:375–382

    Article  Google Scholar 

  • Harrison GW, List JA (2008) Naturally occurring markets and exogenous laboratory experiments: a case study of the winner’s curse. Econ J 118:822–843

    Article  Google Scholar 

  • Hendricks K, Porter R, Tan G (2008) Bidding Rings and the Winner’s Curse. RAND J Econ 39:1018–1041

    Article  Google Scholar 

  • Ivanov A, Levin D, Niederle M (2010) Can relaxation of beliefs rationalize the winner’s curse? An experimental study. Econometrica 78:1435–1452

    Article  Google Scholar 

  • Johnson EJ, Camerer C, Sen S, Rymon T (2002) Detecting failures of backward induction: monitoring information search in sequential bargaining. J Econ Theory 104:16–47

    Article  Google Scholar 

  • Kahneman D (2003) A perspective on judgement and choice: mapping bounded rationality. Am Psychol 58:697–720

    Article  Google Scholar 

  • Kahneman D, Tversky A (1979) Prospect theory: an analysis of decision under risk. Econometrica 47:263–291

    Article  Google Scholar 

  • Klemperer P (1998) Auctions with almost common values: the ‘wallet game’ and its applications. Eur Econ Rev 42:757–769

    Article  Google Scholar 

  • Malhotra D (2010) The desire to win: the effects of competitive arousal on motivation and behavior. Organ Behav Hum Decis 111:139–146

    Article  Google Scholar 

  • Migheli M (2012) It is not just escalation: the one dollar game revisited. J Socio-Econ 41:434–438

    Article  Google Scholar 

  • Milgrom PR, Weber RJ (1982) Econometrica. A theory of auctions and competitive bidding 50:1089–1122

    Google Scholar 

  • Nakamura LI (1993) Loan screening within and outside of customer relationships. Fed Bank Phil Working Paper no. 93-15

  • Parlour CA, Prasnikar V, Rajan U (2007) Compensating for the winner’s curse: experimental evidence. Game Econ Behav 60:339–356

    Article  Google Scholar 

  • Scalco A, Ceschi A, Sartori R, Rubaltelli E (2015) Exploring selfish versus altruistic behaviors in the ultimatum game with an agent-based model. In: Bajo J et al (eds) Trends in practical applications of agents, multi-agent systems and sustainability. Springer, Cham, p 199

    Chapter  Google Scholar 

  • Schnitzlein CR, Shao M (2013) Capacity constraints and the winner’s curse in multi-unit common value auctions. Q Rev Econ Financ 53:188–201

    Article  Google Scholar 

  • Shaffer S (1998) The winner’s curse in banking. J Financ Intermed 7:359–392

    Article  Google Scholar 

  • Shefrin H (2002) Behavioral decision making, forecasting, game theory and role play. Int J Forecast 18:375–382

    Article  Google Scholar 

  • Shubik M (1971) The dollar auction game: a paradox in noncooperative behavior and escalation. J Conflict Resolut 15:109–111

    Article  Google Scholar 

  • Thaler RH (1988) Anomalies: the winner’s curse. J Econ Perspect 2:191–202

    Article  Google Scholar 

  • Tom SM, Fox CR, Trepel C, Poldrack RA (2007) The neural basis of loss aversion in decision-making under risk. Science 315:515–518

    Article  Google Scholar 

  • Valley KL, Moag J, Bazerman MH (1998) ‘A matter of trust’: effects of communication on the efficiency and distribution of outcomes. J Econ Behav Organ 34:211–238

    Article  Google Scholar 

  • Van der Bos W, Li J, Lau T, Maskin E, Cohen JD, Montague PR, McClure SM (2008) The value of victory: social origins of the winner’s curse in common value auctions. Judgm Decis Mak 3:483–492

    Google Scholar 

  • Vendrik MCM, Woltjer GB (2007) Happiness and loss aversion: Is Utility Concave or Convex in Relative Income? J Public Econ 91:1423–1448

    Article  Google Scholar 

  • Von Thadden E-L (2004) Asymmetric information, bank lending and implicit contracts: the winner’s curse. Financ Res Lett 1:11–23

    Article  Google Scholar 

  • Yechiam E, Hiochman G (2013) Loss-aversion or loss-attention: the impact of losses on cognitive performance. Cogn Psychol 66:212–231

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Economics and Statistics “Cognetti de Martiis”, University of Torino, lungo Dora Siena, 100, 10153, Turin, Italy

    Matteo Migheli

  2. CeRP – Collegio Carlo Alberto, via Real Collegio, 30, 10024, Moncalieri, TO, Italy

    Matteo Migheli

Authors
  1. Matteo Migheli
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Matteo Migheli.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Migheli, M. The winner’s curse in auctions with losses. Mind Soc 16, 113–126 (2017). https://doi.org/10.1007/s11299-017-0197-8

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11299-017-0197-8

Keywords

JEL classification

Search

Navigation