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Published May 2002 | public
Journal Article

Quantal Response Equilibrium and Overbidding in First Price Auctions


This paper applies the quantal response equilibrium (QRE) model to study overbidding in private-values auctions. Experimental evidence shows that the prevalence of overbidding depends on the cost of overbidding relative to underbidding, as predicted theoretically. We use QRE as an error structure to estimate parameters of several competing models of overbidding. A QRE model based on risk averse bidders closely tracks the exact distribution of bids. The estimated parameters are significant and consistent across treatments.

Additional Information

© 2002 Elsevier. Received August 2, 2001. This research was funded in part by the National Science Foundation (SBR-9818683 and SBR-9631627). An earlier version of this paper was circulated in November 1999 under the title "Taking the Flat Maximum Critique Seriously". The authors are grateful for comments from Susan Laury, Richard McKelvey, and seminar participants at NYU, GREQAM, Caltech, IBM Watson Labs, the 2000 ESA Meeting, and the 2000 Games Congress. Instructions for the experiments and the complete data are posted at http://www.nyu.edu/jet/supplementary.html.

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