Quantal Response Equilibrium and Overbidding in Private-Value Auctions

A model in which players experience a "joy of winning" provides a reasonable fit of the data but does significantly worse than the risk aversion model, and a model that is essentially equivalent to risk aversion in this context.

Abstract

This paper applies the quantal response equilibrium (QRE) model to study overbidding in private-values auctions. Experimental evidence shows that the prevalence of overbidding depends on the cost of overbidding relative to underbidding, as predicted theoretically. We use QRE as an error structure to estimate parameters of several competing models of overbidding. A QRE model based on risk averse bidders closely tracks the exact distribution of bids. The estimated parameters are significant and consistent across treatments.