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Environmental and Resource Economics

, Volume 29, Issue 3, pp 285–294 | Cite as

Laboratory Testbeds and Non-Market Valuation: The Case of Bidding Behavior in a Second-Price Auction with an Outside Option

  • Todd Cherry
  • Peter Frykblom
  • Jason Shogren
  • John List
  • Melonie Sullivan
Article

Abstract

Researchers now use the lab to examine the behavioral underpinnings of valuation before the field application which some argue has less experimental control. But lab valuation work raises its own set of concerns when it uses private goods to explore non-market valuation behavior because private goods have substitutes often unaccounted for in the lab. Therefore, the lab as a tool to testbed field valuation work may be limited. Herein we design an induced valuation experiment to explore bidding behavior in a second-price auction with an outside option that is a perfect substitute for the auction commodity. Theory predicts that rational bidders will consider the prices of outside options when formulating bidding strategies, and will reduce their bids whenever their resale value exceeds the price of the outside option. Our results suggest that bidders account for outside options when formulating bids with behavior following comparative static predictions. In addition, we provide evidence concerning hypothetical versus actual behavior with induced values – the data suggesting a hypothetical bias in the level of bids but not in bid shaving.

bidding behavior experiments outside option valuation 

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Copyright information

© Kluwer Academic Publishers 2004

Authors and Affiliations

  • Todd Cherry
    • 1
  • Peter Frykblom
    • 1
  • Jason Shogren
    • 2
  • John List
    • 3
  • Melonie Sullivan
    • 4
  1. 1.Department of EconomicsAppalachian State UniversityNC
  2. 2.Department of Economics and FinanceUniversity of WyomingWY
  3. 3.Department of Agricultural and Resource EconomicsUniversity of MarylandMD
  4. 4.National Center for Environmental EconomicsUS Environmental Protection AgencyDC

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