Projection of Private Values in Auctions

Abstract

We explore how taste projection—the tendency to overestimate how similar others’ tastes are to one’s own—affects bidding in auctions. Projecting bidders underestimate the dispersion in valuations and exaggerate the intensity of competition. Consequently, with independent private values, they overbid in first-price auctions but not in second-price ones. Hence, first-price auctions raise more revenue. Moreover, the optimal reserve price in first-price auctions is lower than the rational benchmark and decreasing in the number of bidders. With an uncertain common-value component, projecting bidders draw distorted inferences about others’ information. This misinference is stronger in second-price auctions, reducing their allocative efficiency compared to first-price auctions. We also consider affiliated values and asymmetric bidders.