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Endogenous Entry and Self-selection in Private Value Auctions: An Experimental Study

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  • Palfrey, Thomas R.
  • Pevnitskaya, Svetlana
Abstract
This paper presents the results of an experimental study of endogenous entry and bidding behavior in first-price independent private value auctions. In the first stage N potential bidders simultaneously decide whether to participate in an auction or to claim a fixed outside option. At this stage all potential bidders know N, the distribution of possible values, and the value of the outside option. In the second stage, each entering bidder submits a bid after learning their own private value for the object and the number of entering bidders. We find evidence of self-selection effect, as predicted by an equilibrium model of heterogeneous risk averse bidders. The theoretical model predicts that bidding in the auction will be lower with endogenous entry because only the less risk averse bidders will choose to enter. We also find that entry decreases with the value of the outside option, as predicted. One surprising finding is that we observe over-entry relative to the theoretical predictions.

Suggested Citation

  • Palfrey, Thomas R. & Pevnitskaya, Svetlana, 2003. "Endogenous Entry and Self-selection in Private Value Auctions: An Experimental Study," Working Papers 1172, California Institute of Technology, Division of the Humanities and Social Sciences.
    • Handle: RePEc:clt:sswopa:1172
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    References listed on IDEAS

    as
    1. James Cox & Sam Dinkin & James Swarthout, 2001. "Endogenous Entry and Exit in Common Value Auctions," Experimental Economics, Springer;Economic Science Association, vol. 4(2), pages 163-181, October.
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    5. Kirchkamp, Oliver & Poen, Eva & Reiß, J. Philipp, 2004. "Bidding with Outside Options," Sonderforschungsbereich 504 Publications 04-21, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
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