Projection of Private Values in Auctions
- (pp. 3256-98)
AbstractWe explore how taste projection—the tendency to overestimate how similar others' tastes are to one's own—affects bidding in auctions. In first-price auctions with private values, taste projection leads bidders to exaggerate the intensity of competition and, consequently, to overbid—irrespective of whether values are independent, affiliated, or (a)symmetric. Moreover, the optimal reserve price is lower than the rational benchmark, and decreasing in the extent of projection and the number of bidders. With an uncertain common-value component, projecting bidders draw distorted inferences about others' information. This misinference is stronger in second-price and English auctions, reducing their allocative efficiency compared to first-price auctions.
CitationGagnon-Bartsch, Tristan, Marco Pagnozzi, and Antonio Rosato. 2021. "Projection of Private Values in Auctions." American Economic Review, 111 (10): 3256-98. DOI: 10.1257/aer.20200988
- D11 Consumer Economics: Theory
- D44 Auctions
- D82 Asymmetric and Private Information; Mechanism Design
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness