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

Published online by Cambridge University Press:  17 January 2025

John C. Ham  and
Steven F. Lehrer Open the ORCID record for Steven F. Lehrer [Opens in a new window]
John C. Ham
Affiliation:
NYU Abu Dhabi, Abu Dhabi United Arab Emirates NYU Wagner School, New york city, USA IFAU, Uppsala, Sweden IRP, Madison, USA IZA, Bonn, Germany
Steven F. Lehrer*
Affiliation:
Queens University, Canada NBER, Cambridge, Kingston, USA
*
e-mail: [email protected]
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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.

Keywords

Instrumental variablesLaboratory ExperimentsAuctionsDynamic responses

JEL classification

C23: Panel Data Models • Spatio-temporal Models D44: Auctions C26: Instrumental Variables (IV) Estimation C91: Laboratory, Individual Behavior
Type
Original Paper
Information
Journal of the Economic Science Association , Volume 6 , Issue 2: Special Issue: Statistical Issues for Experimental Economists , December 2020 , pp. 139 - 155
Copyright
Copyright © Economic Science Association 2020

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Footnotes

Electronic supplementary material The online version of this article (https://doi.org/10.1007/s40881-020-00086-1) contains supplementary material, which is available to authorized users.

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