Abstract
In this study, we designed a delayed payment mechanism in laboratory second price auctions (SPAs), under which subjects received a cash endowment two weeks after the experiment day and had to use their own money to pay the experimental losses (if any) on the experiment day. We compared the effect of delayed payment on overbidding in the induced value SPAs with the conventional “on-the-spot” payment mechanism where the subjects received an endowment on the experiment day, and the prepaid mechanism where the subjects received the endowment two weeks before the experiment day. Each auction was repeated for 20 rounds to provide sufficient learning opportunities to the bidders. Our results showed that bids converged to the corresponding values over auction rounds and overbidding was reduced by previous losses, consistently with the adaptive learning theory. Moreover, overbidding seems to depend significantly on bidders’ cash holding, and the magnitude of the payment treatment effects depends crucially on liquidity constraints. In the presence of liquidity constraints, both delayed and prepaid payment mechanisms reduced overbidding, while in the absence of liquidity constraints, only the delayed endowment mechanism reduced overbidding. Furthermore, when controlling the degree of liquidity constraints, subjects with higher GPAs were less likely to overbid and the delayed endowment mechanism significantly reduced overbidding compared to other payment mechanisms. These results suggest that overbidding in SPAs might be caused by bounded rationality and could be reduced by adaptive learning especially when overbidding becomes “truly” costly to subjects.
Highlights
It is well known that in second price sealed bid auctions (SPAs), bidding one’s true value is a weakly dominant strategy [1]
Controlling the degree of liquidity constraints, we found that subjects with higher grade point average (GPA) were less likely to overbid and the delayed endowment mechanism significantly reduced overbidding compared to other payment mechanisms
We found that overbidding was reduced significantly under this mechanism compared to the conventional “on-the-spot” payment mechanism
Summary
It is well known that in second price sealed bid auctions (SPAs), bidding one’s true value is a weakly dominant strategy [1]. Many laboratory experiments have reported significant and persistent overbidding in SPAs, i.e., bidding above one’s value [2, 3]. Delayed payment in experimental auctions for overbidding is based on nonstandard preference such as utility from winning (“joy of winning”) [4, 5] or disutility from losing (“spite”) [6, 7]. Another explanation is “bounded rationality”, under which systematic errors in reasoning are hypothesized to cause overbidding. In a laboratory setting, subjects could have difficulty learning not to overbid as overbidding rarely costs them money [3]
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