Instrumental variables estimation of a simple dynamic model of bidding behavior in private value auctions

John Ham, Steven F. Lehrer

Research output: Contribution to journalArticlepeer-review

Abstract

We provide the first, in experimental economics, consistent estimates of a dynamic learning model with a continuous outcome. The econometric approach we propose can be used in many experimental studies including auctions, bargaining with transfers, and gift exchange experiments. We focus on affiliated private value auctions, where subjects are generally assumed to converge to the rule-of-thumb bidding, but our general approach is applicable to many other settings. Our IV estimates suggest that subjects become significantly less aggressive over time; specifically, they decrease their bids in proportion to the previous period’s signal minus bid. However, the inconsistent OLS and FE estimators imply that subjects become significantly more aggressive over time—they raise their bids in proportion to the previous period’s signal minus bid. Our instruments are randomly generated by the experiment, and pass popular weak instrument tests.
Original languageEnglish (US)
Pages (from-to)139
Number of pages155
JournalJournal of the Economic Science Association
Volume6
DOIs
StatePublished - Dec 20 2020

Keywords

  • Instrumental variables, Laboratory Experiments, Auctions, Dynamic responses

ASJC Scopus subject areas

  • Decision Sciences(all)
  • Economics, Econometrics and Finance(all)

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