Andreas Roider and Patrick W. Schmitz
Scandinavian Journal of Economics, Vol. 114 (3), 2012, 808–830.
Abstract. The experimental literature has documented that there is overbidding in second-price auctions, regardless of bidders' valuations. In contrast, in first-price auctions there tends to be overbidding for large valuations, but underbidding for small valuations. We show that the experimental evidence can be explained by a simple extension of the standard auction model, where bidders anticipate positive or negative emotions caused by the mere fact of winning or losing. Even if the "emotional" (dis-)utility is very small, the seller's optimal reserve price r* may be significantly different from the standard model. Moreover, r* is decreasing in the number of bidders.
The working paper version is available for download (CEPR Discussion Paper 6476).
The paper is available for download.