Common Value Auctions and the Winner's Curse

Common Value Auctions and the Winner's Curse

Common Value Auctions and the Winner's Curse

Common Value Auctions and the Winner's Curse


Few forms of market exchange intrigue economists as do auctions, whose theoretical and practical implications are enormous. John Kagel and Dan Levin, complementing their own distinguished research with papers written with other specialists, provide a new focus on common value auctions and the "winner's curse." In such auctions the value of each item is about the same to all bidders, but different bidders have different information about the underlying value. Virtually all auctions have a common value element; among the burgeoning modern-day examples are those organized by Internet companies such as eBay. Winners end up cursing when they realize that they won because their estimates were overly optimistic, which led them to bid too much and lose money as a result.

The authors first unveil a fresh survey of experimental data on the winner's curse. Melding theory with the econometric analysis of field data, they assess the design of government auctions, such as the spectrum rights (air wave) auctions that continue to be conducted around the world. The remaining chapters gauge the impact on sellers' revenue of the type of auction used and of inside information, show how bidders learn to avoid the winner's curse, and present comparisons of sophisticated bidders with college sophomores, the usual guinea pigs used in laboratory experiments. Appendixes refine theoretical arguments and, in some cases, present entirely new data. This book is an invaluable, impeccably up-to-date resource on how auctions work--and how to make them work.


With various colleagues and students we have been studying common value auctions for well over fifteen years now. We have written a series of papers looking at different aspects of these auctions that have appeared in a number of journals. Having reached closure on a number of questions, we thought it might be nice to pull the papers together in one spot both for the convenience of interested readers and to make the connections between the papers clearer. We have also taken the opportunity to include some of the appendixes to the original material that wound up on the cutting room floor, and that we get requests for from time to time. As part of the exercise we have agreed to update the survey of experimental work on common value auctions which first appeared in the Handbook of Experimental Economics (1995), and to write briefly on the interrelationships between the papers, providing some retrospective thoughts on the work and some of the motivation for undertaking the different studies.

There are many people to acknowledge in a work of this sort. First and foremost are our many coauthors and students without whose collaboration the papers would have never been written. Also, the many referees and discussants of the papers at various conferences, and the referees for the book itself. While maybe not always liking what they had to say at the time, their input has been quite valuable. Funding for the experiments has been provided throughout by the SBS Division of the National Science Foundation. Significant research support has been provided at various times by the Sloan Foundation, the Russell Sage Foundation, Resource for the Future and the Energy Laboratory at the University of Houston. We could not have done the work without the research support. Jo Ducey provided valuable editorial support.

January 2001 . . .

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