Identifying hypothetical bias in experimental auctions in field settings in developing countries

Experimental auctions conducted in the field lose some controls of laboratory experiments as a tradeoff for market realities, which could distort their demand revealing properties both in theory and practice. Ethical reasons have been widely cited for not asking the poor to pay out of pocket in experimental auctions conducted in field settings in developing countries and the allocation of participatory fees is thus common. This endowment creates distortions in an optimal bidding behavior, though evidence is mixed. In this paper, we investigated whether consumers in developing countries will be willing to pay out of pocket when the unit sale price of the auctioned good is an insignificant share of the household food budget. Becker-DeGroot-Marschak (BDM) mechanism was used to collect auction data for biofortified crops in Nigeria, Rwanda, India and Guatemala. We show that an out of pocket payment experimental setting is an alternative practical approach of identifying hypothetical bias in auction bids elicited in the field which could be masked by the windfall income effect created by the participatory fees. This approach shows that auction bids could be inflated by 7 to 24 percent due to hypothetical bias as a result of participants’ ex ante nonpayment decisions. Nonpayment is higher in African countries than in non-African countries, which is a reflection of the underlining heterogeneity in economic background. Conducting experimental auctions in an out-of-pocket payment context can assist in mimicking market realities as close as possible in the field setting in developing countries.