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    Winner's Curse Corrections Magnify Adverse Selection

    Harstad, Ronald M.
    Bordley, Robert
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    [PDF] WinnersCurseCorrection.pdf (154.8Kb)
    Date
    2009
    Format
    Working Paper
    Metadata
    [+] Show full item record
    Abstract
    The adverse-selection literature has only considered the case in which competing sellers' costs of supply are independent and privately known by the individual sellers. In contrast, the auction literature has ignored adverse selection by implicitly assuming that a bid-taker is indifferent between suppliers at a given price. We show that competition in auctions with common-value elements serves to magnify the impact of adverse selection, as a bidder supplying a higher-cost product rationally makes a heightened winner's curse correction in a procurement auction. Hence lower-cost suppliers are disproportionately likely to win the auction, potentially creating a more serious quality problem for the procurer than mainstream adverse-selection models suggest.
    URI
    http://hdl.handle.net/10355/2383
    Part of
    Working papers (Department of Economics);WP 09-07
    Part of
    Economics publications
    Citation
    Department of Economics, 2009
    Rights
    OpenAccess.
    This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 License.
    Collections
    • Economics publications (MU)

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