Learning by investing Evidence from a naturally occurring auction 1 Jan Hanousek* and Evz ˇen Koc ˇenda** *Charles University, CERGE-EI, Prague, Politickych veznu 7, 111 21 Prague 1; Anglo-American University, Prague, Czech Republic; CEPR; WDI. E-mail: jan.hanousek@cerge-ei.cz **Charles University, CERGE-EI, Prague, Politickych veznu 7, 111 21 Prague 1; Anglo-American University, Prague, Czech Republic; CEPR; WDI; CESifo, OEI. E-mail: evzen.kocenda@ cerge-ei.cz Abstract We test for learning among heterogeneous individuals who are engaged in bidding and who possess limited information about the auctioned assets. We use an exten- sive dataset taken from an auction through which state-owned enterprises were privatized in the Czech Republic in 1993–94. To test for learning, we develop new measures of individual performance to accommodate the varying prices of assets available in six successive stages of bidding. We present evidence that learning took place among heterogeneous agents during a large-scale multi-stage auction that is unique in terms of its size, incentives and variation. The auction’s design, with mul- tiple market periods, allowed agents to learn based on accumulated experience. As individuals had to pay a fee to participate, and as the potential gain was in the mag- nitude of several months’ salary, we conclude that large incentives were driving our results. JEL classifications: C14, C93, D44, D82, D83, G14, P43. Received: October 20, 2008; Acceptance: January 27, 2010 1 For helpful comments, the authors are grateful to Parker Ballinger, Glenn Harrison, John List, Andreas Ortmann, Ondr ˇej Rydval, and an anonymous referee. Isabel Schnabel (editor) provided numerous specific and helpful suggestions. The authors have also benefited from several presentations. Financial support from the GACR Grant No. 402/09/1595 is acknowledged. The usual disclaimer applies. Economics of Transition Volume 19(1) 2011, 125–149 DOI: 10.1111/j.1468-0351.2010.00394.x Ó 2010 The Authors Economics of Transition Ó 2010 The European Bank for Reconstruction and Development. Published by Blackwell Publishing Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main St, Malden, MA 02148, USA