I propose a model of loss-averse bidders with endogenous trading intentions. Endowment effect has been widely reported in laboratory settings (Knetsch 1989, Tversky and Kahneman 1991, Loewenstein and Adler 1995, Kahneman, Knetsch and Thaler 1990, Benartzi and Thaler 1995, Camerer 1995, List 2003, 2004). Recently such preferences have been applied to auction settings which suggest that differences can arise between the laboratory induced value and real commodity auctions due to anticipated loss aversion (Lange and Ratan 2010). Another implication of such preferences is that in the presence of outside markets for auction commodity, such preferences will affect bidding: differences in access to outside markets would then affect trading intentions and produce differences from neoclassical predictions.
In a stylized first-price auction, I show that bidders with advantageous access to outside markets are least affected by anticipated loss-aversion and bid closer to neoclassical predictions while bidders with less advantageous access to outside markets are more affected by anticipated loss-aversion and bid differently from neoclassical predictions. If market access is interpreted as a proxy for market experience, the results support the findings in List (2003, 2004).
This paper makes the following contributions to the literature: first, it highlights the implications of endogenously determined trading intentions for bidding in real commodity auctions. Because such effects are not relevant for induced value auctions, it suggests an additional difference between field and induced value auctions. These findings have potentially significant implications for the interpretation of laboratory data and transferring qualitative insights to bidding in real commodity auctions (List and Harrison 2004; Lange and Ratan 2010). Second, extending the effect of endogenous trading intentions to other auction contexts can explain puzzling phenomenon; especially towards understanding incremental bidding in online auctions where low transaction and communication costs have expanded the trading opportunities for real commodities. Third, the paper suggests that in my framework, innate differences in preferences are not required to produce differences between the laboratory and real commodity auctions; this calls for a careful reinterpretation of List’s (2003, 2004) findings which suggest previous market experience could alter preferences.
Date: February 18, 2011
Time: 03:00 P.M.
New Seminar Room [First Floor],
Department of Economics,
Delhi School of Economics,
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