Affiliation:
1. Department of Economics and Business School, Harvard University (email: )
2. Department of Economics and Statistics, Università di Napoli Federico II and CSEF (email: )
3. Economics Discipline Group, University of Technology Sydney; Department of Economics and Statistics, Università di Napoli Federico II and CSEF (email: )
Abstract
We explore how taste projection—the tendency to overestimate how similar others’ tastes are to one’s own—affects bidding in auctions. In first-price auctions with private values, taste projection leads bidders to exaggerate the intensity of competition and, consequently, to overbid—irrespective of whether values are independent, affiliated, or (a)symmetric. Moreover, the optimal reserve price is lower than the rational benchmark, and decreasing in the extent of projection and the number of bidders. With an uncertain common-value component, projecting bidders draw distorted inferences about others’ information. This misinference is stronger in second-price and English auctions, reducing their allocative efficiency compared to first-price auctions. (JEL D11, D44, D82, D83)
Publisher
American Economic Association
Subject
Economics and Econometrics
Cited by
12 articles.
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