The nature of information and its effect on bidding behavior: laboratory evidence in a common value auction

We study in the laboratory a series of first price sealed bid auctions of a common value good. Bidders face three types of information: private information, public information and common uncertainty. Auctions are characterized by the relative sizeof these three information elements. According to Nash Equilibrium theory, bids can be decomposed into two additive parts. For the private information, bidders should shade their bid. For the common uncertainty and public information, bidders shouldcompete `a la Bertrand and bid the expected and realized values respectively. We find that departures from equilibrium predictions occur not only with respect to private information but with respect to public information and common uncertainty as well. A cluster analysis shows that there is heterogeneous behavior with respect to each of these three information elements. Estimation of the Cognitive Hierarchy and Cursed Equilibrium models reveals that each model captures some important aspects of thebehavior of subjects. However, the disparity of the estimated parameters as we vary the relative size of the three types of information suggests that their predictive power is limited.