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.