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Quantal Response Equilibrium and Overbidding in Private-Value Auctions (1999)
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| Venue: | Journal of Economic Theory |
| Citations: | 108 - 21 self |
BibTeX
@ARTICLE{Goeree99quantalresponse,
author = {Jacob K. Goeree and Charles A. Holt and Thomas R. Palfrey},
title = {Quantal Response Equilibrium and Overbidding in Private-Value Auctions},
journal = {Journal of Economic Theory},
year = {1999},
volume = {104},
pages = {247--272}
}
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Abstract
This paper reports the results of a private-values auction experiment in which expected costs of deviating from the Nash equilibrium bidding function are asymmetric, with the implication that upward deviations will be more likely in one treatment than in the other. Overbidding is observed in both treatments, but is more prevalent in the treatment where the costs of overbidding are lower. We specify and estimate a noisy (quantal response) model of equilibrium behavior. Estimated noise and risk aversion parameters are highly significant and consistent across treatments. The resulting two-parameter model tracks both the average bids and the distribution of bids remarkably well. Alternative explanations of overbidding are also considered. The estimates of parameters from a nonlinear probability weighting function yield a formulation that is essentially equivalent to risk aversion in this context. A model in which players experience a "joy of winning" provides a reasonable fit of the data but does significantly worse than the risk aversion model.
Keyphrases
quantal response equilibrium private-value auction risk aversion model two-parameter model track risk aversion parameter average bid nash equilibrium bidding function function yield reasonable fit alternative explanation private-values auction experiment equilibrium behavior upward deviation nonlinear probability quantal response
