Abstract
First-price auction theory is extended to the case of heterogeneous bidders characterized byM-parameter log-concave utility functions. This model, and its specific two-parameter constant relative risk averse special case, is generally supported by the results of 47 experiments. The one-parameter special case that comprises most of the theoretical literature is not supported by the experiments. One anomaly for the two-parameter model is that too many of the subjects exhibit positive (or negative) intercepts in their linear estimated bid functions. Accordingly, we develop a specific three-parameter model, which introduces a utility of winning, and a threshold utility of surplus. The new model, tested directly by introducing lump-sum payments or charges for winning, is not falsified by the new experiments.
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Cox, J.C., Smith, V.L. & Walker, J.M. Theory and individual behavior of first-price auctions. J Risk Uncertainty 1, 61–99 (1988). https://doi.org/10.1007/BF00055565
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DOI: https://doi.org/10.1007/BF00055565