Bidding Behavior under Costly Information Acquisition: an Experimental Study

This paper presents the results of an experiment on the economics of endogenous information acquisition. The experiment consists of a series of auctions where subjects compete for an object with private but unknown value. The information regarding the value of the object is costly. The experiment tests a theoretical model of bidding equilibrium and analyzes the effects of variations in the parameters (such as information costs and level of uncertainty) on the endogenous variables (such as the proportion of bidders who buy information and the winning bid). Bidders’ decisions concerning the purchase of information are closely consistent with a Risk Neutral Rational Expectations model. The winning bids, however, are persistently above the equilibrium predictions suggesting the presence of risk aversion. (*) Department of Economics, University of Illinois at UrbanaChampaign and Department of Economics, University of California at Santa Barbara. Research supported in part by grants from the Research Board of the University of Illinois, the Academic Senate of the University of California, and NSF Grant SBR-9496303. The authors gratefully acknowledge the provision of an experimental economics laboratory and computer support services by the Commerce Research Office of the University of Illinois at Urbana-Champaign. We also appreciate helpful suggestions from John Braden and Anne Villamil concerning the design of the experiment. However, none of them bears responsibilities for shortcomings. 2 Bidding Behavior Under Costly Information Acquisition: An Experimental Study