Econometrica: Nov 2007, Volume 75, Issue 6

Level‐ Auctions: Can a Nonequilibrium Model of Strategic Thinking Explain the Winner's Curse and Overbidding in Private‐Value Auctions?

https://doi.org/10.1111/j.1468-0262.2007.00810.x
p. 1721-1770

Vincent P. Crawford, Nagore Iriberri

This paper proposes a structural nonequilibrium model of initial responses to incomplete‐information games based on “level‐” thinking, which describes behavior in many experiments with complete‐information games. We derive the model's implications in first‐ and second‐price auctions with general information structures, compare them to equilibrium and Eyster and Rabin's (2005) “cursed equilibrium,” and evaluate the model's potential to explain nonequilibrium bidding in auction experiments. The level‐ model generalizes many insights from equilibrium auction theory. It allows a unified explanation of the winner's curse in common‐value auctions and overbidding in those independent‐private‐value auctions without the uniform value distributions used in most experiments.

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Supplemental Material

Supplementary material for: "Level-k Auctions: Can a Non-Equilibrium Model of Strategic Thinking Explain the Winner's Curse and Overbidding in Private-Value Auctions?"

This Web Appendix provides background and more detail for the paper. It has five sections, the last of which, containing figures, is in a separate pdf file:A. Interaction between value adjustment and the bidding trade-off in first-price auctions.B. Calculation of First- and Second-Price Equilibrium, Cursed Equilibrium, and Level-k Bidding Strategies for Kagel and Levin's (1986), Avery and Kagel's (1997) and Goeree, Holt and Palfrey's (2002) Experimental Designs.C. Estimates for Level-k plus Equilibrium Models with versus without Truthful Types.D. Estimates of Subject-specific Precisions and Standard Errors (starts at A-29).E. Logit Bid Densities for Random L1, Random L2, Truthful L1, Truthful L2, and Equilibrium and Representative Precisions.(For section E see: "Supplementary material for "Level-k Auctions: Can a Non-Equilibrium Model of Strategic Thinking Explain the Winner's Curse and Overbidding in Private-Value Auctions?": Graphs").

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Supplementary material for "Level-k Auctions: Can a Non-Equilibrium Model of Strategic Thinking Explain the Winner's Curse and Overbidding in Private-Value Auctions?": Data and Programs

This zip file provides the initial-response data from the four treatments analyzed in the paper, as well as instructions and Matlab files for replicating the econometric analysis. See ReplicabilityReadMe file for detailed description.

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Supplementary material for "Level-k Auctions: Can a Non-Equilibrium Model of Strategic Thinking Explain the Winner's Curse and Overbidding in Private-Value Auctions?": Graphs

This file contains Section E of the Web Appendix, which graphs the logit bid densities for Random L1, Random L2, Truthful L1, Truthful L2, and Equilibrium and Representative Precisions, to illustrate the implications of the precision estimates reported in Tables IIIa-IIId and Section D of the Web Appendix.

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