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Cognitive Ability and Bidding Behavior in Second Price Auctions: An Experimental Study
Author(s) -
Lee Ji Yong,
Nayga Rodolfo M.,
Deck Cary,
Drichoutis Andreas C.
Publication year - 2020
Publication title -
american journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.949
H-Index - 111
eISSN - 1467-8276
pISSN - 0002-9092
DOI - 10.1002/ajae.12082
Subject(s) - bidding , common value auction , valuation (finance) , microeconomics , cognition , economics , psychology , econometrics , finance , neuroscience
This paper examines what connection, if any, there is between cognitive ability and bidding strategy in second price auctions. Despite truthful revelations being a weakly dominant strategy, previous experiments have consistently observed overbidding, which makes the use of such auctions for inferring homegrown values problematic. Examining the effect of cognitive ability is important, as it may help identify when one can reliably recover values from observed bids. The results indicate that more cognitively able subjects behave in closer accordance with theory, and that cognitive ability partially explains heterogeneity in bidding behavior. Our results suggest that considering subjects' cognitive ability in homegrown valuation studies can help identify the true underlying demand conditions.