Abstract
Shill bidding is when the seller enters a bid. Bidders decide whether to trust that he is not shill bidding. Thus, an untrusting individual is expected to respond adversely. We design an experiment to test this hypothesis. Using a Trust Game, we document that the potential for shill bidding lowers bids. In fi rst-price IPV auctions, less trusting individuals submit lower bids when shill bidding is possible. In second-price auctions, subjects with lower expectations of others' trust respond by lowering their bid. Sellers do engage in shill bidding, but rarely win. Shill bidding worsens allocative efficiency and exacerbates revenue equivalence's failure.
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