Auctions and Land Values: An Experimental Analysis

Although urban land development is a well-researched area, there has been inadequate research on the allocation mechanism for land. This paper offers a new perspective on the effects of the auction mechanism on land values. By appealing to an experimental setting to examine the bidding behaviour of developers in repeated first-price sealed bid (FPSB) auctions where resolution of price uncertainty (development revenue) is deferred, it is shown that overbidding is pervasive. Participants consistently shave expected profit margins in order to secure land for development. The actual profit margins reported in all experiments are significantly lower than the suggested benchmark made known before the experiments. Consequently, participants tend to experience smaller ex post profits relative to ex ante expectations. However, we find that repeated bidding does mitigate overbidding to some extent, as evidenced by lower differences in the winning bid to the second-highest bid. Convergence in the range of bids occurs over time, but only significantly so when public information in terms of an expectation of the future property price, is provided. This study offers interesting policy implications for urban land development.