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An experiment on auctions with endogenous budget constraints

Author

Listed:
  • Lawrence M. Ausubel

    (University of Maryland)

  • Justin E. Burkett

    (Wake Forest University)

  • Emel Filiz-Ozbay

    (University of Maryland)

Abstract

We perform laboratory experiments comparing auctions with endogenous budget constraints. A principal imposes a budget limit on a bidder (an agent) in response to a principal-agent problem. In contrast to the existing literature where budget constraints are exogenous, this theory predicts that tighter constraints will be imposed in first-price auctions than in second-price auctions, tending to offset any advantages attributable to the lower bidding strategy of the first-price auction. Our experimental findings support this theory: principals are found to set significantly lower budgets in first-price auctions. The result holds robustly, whether the principal chooses a budget for human bidders or computerized bidders. We further show that the empirical revenue difference between first- and second-price formats persists with and without budget constraints.

Suggested Citation

  • Lawrence M. Ausubel & Justin E. Burkett & Emel Filiz-Ozbay, 2017. "An experiment on auctions with endogenous budget constraints," Experimental Economics, Springer;Economic Science Association, vol. 20(4), pages 973-1006, December.
    • Handle: RePEc:kap:expeco:v:20:y:2017:i:4:d:10.1007_s10683-017-9520-9
    DOI: 10.1007/s10683-017-9520-9
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    References listed on IDEAS

    as
    1. David J. Cooper & Hanming Fang, 2008. "Understanding Overbidding in Second Price Auctions: An Experimental Study," Economic Journal, Royal Economic Society, vol. 118(532), pages 1572-1595, October.
    2. Burkett, Justin, 2016. "Optimally constraining a bidder using a simple budget," Theoretical Economics, Econometric Society, vol. 11(1), January.
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    Cited by:

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    5. Jinsoo Bae & John H. Kagel, 2022. "Selling shares to budget-constrained bidders: an experimental study of the proportional auction," Journal of the Economic Science Association, Springer;Economic Science Association, vol. 8(1), pages 45-55, December.

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    More about this item

    Keywords

    Auctions; Endogenous budget constraint; Principal-agent problem;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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