An experiment on auctions with endogenous budget constraints |
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Authors: | Lawrence M Ausubel Justin E Burkett Emel Filiz-Ozbay |
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Institution: | 1.Department of Economics,University of Maryland,College Park,USA;2.Department of Economics,Wake Forest University,Winston-Salem,USA |
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Abstract: | We perform laboratory experiments comparing auctions with endogenous budget constraints. A principal imposes a budget limit on a bidder (an agent) in response to a principal-agent problem. In contrast to the existing literature where budget constraints are exogenous, this theory predicts that tighter constraints will be imposed in first-price auctions than in second-price auctions, tending to offset any advantages attributable to the lower bidding strategy of the first-price auction. Our experimental findings support this theory: principals are found to set significantly lower budgets in first-price auctions. The result holds robustly, whether the principal chooses a budget for human bidders or computerized bidders. We further show that the empirical revenue difference between first- and second-price formats persists with and without budget constraints. |
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