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Projection of Private Values in Auctions

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Abstract
We explore how taste projection – the tendency to overestimate how similar others’ tastes are to one’s own – affects bidding in auctions. Taste-projecting bidders underestimate the dispersion in valuations and exaggerate the intensity of competition. Consequently, they overbid in firstprice auctions – irrespective of whether values are independent, correlated, or (a)symmetrically distributed – but not in second-price auctions. Hence, first-price auctions raise more revenue. Moreover, the optimal reserve price in first-price auctions 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.

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  • Tristan Gagnon-Bartsch & Marco Pagnozzi & Antonio Rosato, 2020. "Projection of Private Values in Auctions," CSEF Working Papers 571, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    • Handle: RePEc:sef:csefwp:571
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    Cited by:

    1. Mira Frick & Ryota Iijima & Yuhta Ishii, 2018. "Dispersed Behavior and Perceptions in Assortative Societies," Cowles Foundation Discussion Papers 2128R2, Cowles Foundation for Research in Economics, Yale University, revised Oct 2021.
    2. Gretschko, Vitali & Mass, Helene, 2024. "Worst-case equilibria in first-price auctions," Theoretical Economics, Econometric Society, vol. 19(1), January.
    3. Giacomo Rubbini, 2023. "Mechanism Design without Rational Expectations," Papers 2305.07472, arXiv.org, revised Nov 2023.
    4. Rosato, Antonio & Tymula, Agnieszka A., 2024. "A novel experimental test of truthful bidding in second-price auctions with real objects," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 111(C).
    5. Ollar, Mariann & Penta, Antonio, 2024. "Incentive Compatibility and Belief Restrictions," TSE Working Papers 24-1558, Toulouse School of Economics (TSE).

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    More about this item

    Keywords

    Auctions; Projection Bias; False-Consensus Effect; Overbidding.;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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