Projection of Private Values in Auctions

Abstract

This paper explores how taste projection—the tendency for people to overestimate how similar others’ tastes are to their own—affects bidding in auctions. We consider auctions for a good with both private and common-value elements. Each bidder misperceives the distribution of private values by thinking that others’ private values are closer to her own than they really are. Hence, when valuations are in fact independent across bidders, projection causes those bidders with high private values to overestimate the likelihood that others have high valuations and those with low private values to think the opposite. Because it leads bidders to underestimate the dispersion in private values, projection induces them to exaggerate the extent of competition. In the case of pure private values, this generates overbidding in first-price (or Dutch) auctions, but has no effect in second-price (or English) auctions. Hence, a first-price auction yields a higher expected revenue than a second-price one. This revenue ranking continues to hold when the good additionally has an uncertain common-value component. Furthermore, in these settings with a common-value element, projection leads bidders to draw distorted inferences about others’ information from their equilibrium bids. This mis-inference always reduces the allocative efficiency of a second-price auction, but can increase that of a first-price auction.

About the presenter’s visit

Antonio Rosato will be visiting the School of Economics on Tuesday 24^th September 2019.  While here he will be using room 520A Colin Clark Building. If you would like to meet with him or have lunch or dinner with him please contact A/Prof Heiko Gerlach who will be his host while at The University of Queensland. A/Prof Gerlach can be contacted on h.gerlach@uq.edu.au.