Projection of Private Values in Auctions
- American Economic Review (Forthcoming)
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.
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