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When Does an Incentive for Free Riding Promote Rational Bidding?

In: Experimental Business Research

Author

Listed:
  • James C. Cox

    (University of Arizona)

  • Stephen C. Hayne

    (Colorado State University)

Abstract

Economics has focused on models of individual rational agents. But many important decisions are made by small groups such as families, management teams, boards of directors, central bank boards, juries, appellate courts, and committees of various types. For example, bid amounts in common value auctions such as the Outer Continental Shelf oil lease auction are typically decided by committees. Previous experimental research with natural groups has found that group bidders are significantly less rational than individual bidders in how they use information in common value auctions. Experiments reported here involve cooperative and non-cooperative nominal groups. The unequal profit-sharing rule applied to non-cooperative nominal groups creates an incentive to free ride within the bidding groups. This incentive to free ride tends to offset the winner’s curse and promote rational bidding.

Suggested Citation

  • James C. Cox & Stephen C. Hayne, 2005. "When Does an Incentive for Free Riding Promote Rational Bidding?," Springer Books, in: Amnon Rapoport & Rami Zwick (ed.), Experimental Business Research, chapter 0, pages 133-149, Springer.
    • Handle: RePEc:spr:sprchp:978-0-387-24243-9_7
    DOI: 10.1007/0-387-24243-0_7
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    Cited by:

    1. Roman Sheremeta & Jingjing Zhang, 2010. "Can groups solve the problem of over-bidding in contests?," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 35(2), pages 175-197, July.
    2. Ahn, T.K. & Isaac, R. Mark & Salmon, Timothy C., 2011. "Rent seeking in groups," International Journal of Industrial Organization, Elsevier, vol. 29(1), pages 116-125, January.

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