A novel experimental test of truthful bidding in second-price auctions with real objects

Abstract

We present experimental evidence on bidding in second-price auctions with real objects. Our novel design, combining a second-price auction with an individual-specific binary-choice task based on the outcome of the auction, allows us to directly identify over- and under-bidding. We analyze bidding in real-object and induced-value auctions, and find significant deviations from truthful bidding in both. Overall, under-bidding is somewhat more prevalent than over-bidding; yet, the latter has a bigger magnitude, especially with induced values. At the individual level, however, we find that participants who over-bid in induced-value auctions are equally likely to over- or under-bid in real-object ones; moreover, there is no association in the size of the deviations from truthful bidding across the two types of auctions. Hence, we conclude that there is no relation between the tendency to deviate from truthful bidding in induced-value vs. real-object auctions.