Comparative static effects of number of bidders and public information on behavior in second-price common value auctions

Abstract

Comparative static tests of Nash bidding theory in second-price common value auctions show that bidders fail to respond in the right direction to more rivals and to public information concerning the value of the item. The former provides a clear indication that bidders fail to appreciate the adverse selection forces inherent in common value auctions, while the latter shows that policy prescriptions can fail given out-of-equilibrium behavior. These tests of Nash bidding theory apply to a far wider variety of circumstances than in first-price auctions, so there is less scope to rationalize the failure of the theory.