Collaborative Research: In Experimental Studies of Auction Markets

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There are three parts in this project. The first part deals with learning processes in common value (mineral rights) auctions. Inexperienced bidders in these auctions suffer from the winner's curse, earning negative profits and bidding above the expected value conditional on winning the item. Experience bidders adjust to the adverse selection forces, eventually earning positive profits. The question is exactly what it is that subjects are learning. Are they simply learning to bid less for any given environment, a reaction to losing money as a consequence of winning, or learning to understand the adverse selection forces, which would indicate some ability to generalize across environments. The research has practical implications for understanding bidding behavior in mineral rights auctions and coincides with recent theoretical interest in learning processes in economics as well. The second part studies private value double auctions. Recent developments in theoretical analyses of double auction mechanisms have concentrated on single shot auctions in which traders' valuations are drawn randomly from distributions whose structure is common knowledge, and in which traders have inelastic demands or supplies for a single unit of consumption at a reservation price that is privately known. The motivation for detailed game theoretical studies of particular trading rules is to elaborate precisely how trading rules and each trader's strategic behavior using his private information combine to determine terms of trade that reflect substantially all the disbursed information. In this project, the experimental investigation of these trading rules is designed to determine the behavioral robustness of these predictions. These studies are important since double auctions are a fundamental trading environment for market economies. The last part deals with experimental and field studies of auctions with incentive contracts. Incentive contracts make the payment depend both on the bid and the realized cost. If realized cost exceeds the firm's bid, the firm is responsible for some farction of the cost overrun; if the firm succeeds in keeping its cost below its bid, it is reqarded by being allowed to keep part of the cost underrun. Incentive contracts are of considerable potential practical importance in Department of Defense weapons acquisition and are commonly employed in the construction industry as an alternative to fixed price bid contracts. Further, Nash equilibrium bidding theory makes several clear and novel predictions for incentive contracts that have yet to be subject to systematic study.