Behavior in All-Pay and Winner-Pay Auctions with Identity-Dependent Externalities

*Bettina Klose
ISU, University of Zurich

Roman Sheremeta
Department of Economics, Chapman University

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     Last modified: March 11, 2011
     Presentation date: 03/12/2011 10:45 AM in NH 1150, Session D
     (View Schedule)

Abstract
We experimentally investigate all-pay and winner-pay auctions with positive and
negative identity-dependent externalities. We use a symmetric three player environment with complete information. The results of the experiment indicate that behavior strongly depends on the payoff space. Although the all-pay auction yields higher revenue than the winner-pay auction in environments with negative identity-dependent externalities (caused by both overbidding in the all-pay and under-bidding in the winner-pay auction), average revenue and bids approximate their theoretical predictions closely in treatments with positive identity-dependent externalities or without identity-dependent externalities when subjects are experienced. Furthermore, we observe that even experienced
subjects do not randomize continuously but rather bimodal in our all-pay auction
treatments. While average bids are very close to the risk-neutral Nash equilibrium prediction for the treatment with positive identity-dependent externalities, they remain significantly higher in both other treatments. We estimate coefficients for risk- and loss-aversion and find that the observed bid distributions are well explained when allowing for an s-shaped utility function.