Nonlinear Behavior in Sealed Bid First Price Auctions

Abstract

Agents drew values from nonuniform distributions in first price sealed bid auctions. As a result, the theoretical bidding behavior is nonlinear. Three linear rules of thumb with increasing complexity are used as benchmarks to gauge the accuracy of the Constant Relative Risk Aversion Model (CRRAM). CRAMM is more accurate then the Markdown Model and the Simple Ad Hoc Model, but not as accurate as the Sophisticated Ad Hoc Model. The data support the relaxation of the rational expectations hypothesis and suggest that the predictive power of game theoretic models can be improved by improvements in the theory of belief formation.

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