Capacity constraints and the winner's curse in multi-unit common value auctions

We explore the role of capacity constraints in establishing efficient pricing in multi-unit common value auctions in a setting relevant to auction-based equity IPOs. The method of inquiry is experimental economics. We find that sufficiently large capacity constraints mitigate the overbidding that plagues single-unit auctions and is one of the most robust laboratory findings. We also uncover a puzzling propensity for most bidders to place a portion of their bids at prices above their signals. This disequilibrium behavior persists with experience and in cases with substantial losses in previous auctions. Our results suggest caution is warranted in promoting auction based IPOs that allow unrestricted access by the non-professional investing public.