Second-chance offers and buyer reputation : theory and evidence on auctions with default

Winning bidders in online auctions frequently fail to complete the transaction. Because enforcing bids usually is too costly, auction platforms often allow sellers to make a "secondchance" offer to the second highest bidder, to buy at the bid price of this bidder, and let sellers leave negative feedback on buyers who fail to pay. We show theoretically that, all else equal, the availability of second-chance offers reduces amounts bid in auctions where there is a probability that a bidder defaults. Nevertheless, we show that it is not optimal for a seller to exclude a buyer who is likely to default. In addition, buyer reputation systems create a strategic effect that rewards bidders who have a reputation for defaulting, counter to the idea of creating a deterrent against such behavior. Actual bidding in experimental auctions support these predictions and provide insights on their practical relevance.