In experiments, Winner's Curse is most likely to hold for

Question

BlackTom AI · Accepted Answer

Winner's Curse arises when the winner's information is the most optimistic among bidders, so winning tends to signal an overestimate of the item's common value.

1. Relevant concepts
- Private vs common values: In private-value auctions each bidder's valuation is independent and intrinsic; in common-value auctions the true value is the same for everyone but bidders have noisy private signals about it.  
- Auction formats: First-price (sealed-bid, winner pays own bid), second-price (sealed-bid, winner pays second-highest bid), English (ascending open auction), Dutch (descending-price, winner pays their bid).  
- Winner's Curse: In common-value contexts, the highest signal is likely an overestimate of the true common value (selection bias). If bidders do not correctly adjust for this, the winner can overpay.

2. Step-by-step reasoning
Step 1: In private-value settings each bidder knows her own value; winning does not imply an overestimate of a common unknown, so winner’s curse does not arise.  
Step 2: In common-value settings bidders receive noisy signals of the same underlying value. The bidder with the highest signal is likely the most optimistic (highest noise realization). Conditional on winning, the expected true value is typically lower than the winner’s signal — this is the selection bias that creates the winner’s curse.  
Step 3: Auction format matters for information revelation and payment. Open ascending (English) auctions allow price discovery and reveal others’ willingness to pay, so bidders can update downward and mitigate the curse. Sealed-bid auctions (especially first-price) give little information; the winner pays their own (optimistic) bid, increasing chances of overpayment.

3. Why the first-price common-value auction is the best fit
- In a first-price common-value auction: (a) bidders submit sealed bids based on their own optimistic signal, (b) the winner is the highest signal, and (c) the winner pays her own bid — directly exposing her to overpayment when her signal overstates true value. Sealed bidding prevents post-bid information updating, so the selection bias is strongest.

4. Why other options are incorrect
- English auction with private values: private values remove the common-value selection effect; plus English format reveals information, so no winner’s curse.  
- Dutch auction with private values: again private values imply no winner’s curse.  
- Second-price auction with private values: truthful bidding is dominant in private-value second-price auctions, so no winner’s curse.

5. Conclusion
Because the winner’s curse is driven by common values plus lack of information revelation and the winner paying her own optimistic bid, the phenomenon is most likely in the first-price auction with common values — which matches the provided answer.

In experiments, Winner's Curse is most likely to hold forSingle choice

Similar Questions

The phenomenon that some people may actually pay a higher price for auctioned products than they would pay an online retailer is known as ________.

Which statement about batch auctions (call auctions) is correct?

(continued) The equilibrium price in the English auction is

The overbidding in exotic auctions is best explained by

(continued) The equilibrium price in the first-price auction is:

Consider three bidders who have private values that are independently and uniformly distributed between 0 and 100. Suppose that these values happen to be v1 = 30, v2 = 90, and v3 = 10. Then the equilibrium price in the second-price auction is:

In a continuous double auction (CDA), orders and cancellations arrive in continuous time and are processed one at a time based on established rules.

What was the world's first widely adopted biodiversity policy?

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler