Can we overcome the Winners Curse by (behavioral) Auction Design?

The Winner’s Curse (WC) is a non-equilibrium behavior in common-value auctions involving systematic overbidding leading to signi…cant losses. We propose a static auction mechanism with a payment rule that internalizes the adverse selection, resulting in sincere bidding, as no-regret equilibrium. We compare this mechanism with other payment rules resulting in sincere bidding equilibrium but with regret. The other rules use excessive information, and we study whether that helps bidders …nd their way to equilibrium bidding. Our no-regret rule generates signi…cantly less WC than the static …rst-price auction, but more than the dynamic English auction. Yet, our other, more intuitive, sincere bidding rule mitigates overbidding better than the no-regret rule, and remarkably for a sealed-bid design, matches the performance of the dynamic English auction. Keywords: common value auction, direct mechanism, English auction, lab experiment. JEL classi…cation: C72, C92, D44 Financial support from Maastricht University through METEOR and the Department of Economics (AE1) is gratefully acknowledged. We thank Lawrence Ausubel, B. Douglas Bernheim, Vitali Gretschko, Jacob Goeree, Ron Harstad, Sergiu Hart, Michael Mandler, Marco Pagano, Marco Pagnozzi, Robert Porter, Orly Sade, Jereon Swinkels, Leeat Yariv and audiences in Ankara, Berkeley, Evanston (MEA2012; Kellogg), Exeter, Istanbul (GAMES2012), London (RHUL), Mannheim (2017 ZEW Market Design Workshop), Naples, Salerno, Stanford (seminar and SITE2011), Jerusalem, and Maastricht (MBEES2011) for helpful comments. Special thanks to Yaron Azrieli for many helpful comments and to John Kagel for providing the comparison data on …rst-price common value auctions. yDepartment of Economics, The Ohio State University, 1945 North High Street, Columbus, OH 43210, e-mail: levin.32@osu.edu. zKarlsruhe Institute of Technology (KIT), Institute of Economics (ECON), Bluecherstr. 17, 76185 Karlsruhe, Germany, e-mail: philipp.reiss@kit.edu.