Methodological Developments and Issues in Experimental Auctions (Rodolfo M. Nayga, University of Arkansas, Organizer) ARE EXPERIMENTAL AUCTIONS DEMAND REVEALING WHEN VALUES ARE AFFILIATED? JAY R. CORRIGAN AND MATTHEW C. ROUSU The theoretical properties of purely private and purely common value auctions are well understood (Krishna 2002), and have been extensively tested in the lab (Kagel 1995). Empirical researchers, however, have paid much less attention to the arguably more realis- tic scenario where a good’s value is “affiliated” or determined by a combination of private and common value components. Milgrom and Weber (1982) show that when a good’s value is affiliated, the second-price sealed bid auction ( Vickrey 1961) is no longer incentive compatible, because rational agents must adjust their bidding strategies to take into account that the winning bidder’s com- mon value signal likely exceeds the good’s true common value. Auction participants’ bids then no longer reflect their best guess of a good’s value, but instead are adjusted downward to avoid the winner’s curse. In this environment, second-price auctions may also lead to ineffi- cient allocation if the bidder with the highest private value receives a relatively low com- mon value signal and, as a result, is outbid by a competitor with a lower private value. While these theoretical predictions are well understood, economists have only recently begun to test them empirically. Work in this area has focused primarily on alloca- tive efficiency and revenue maximization (e.g., Kirchkamp and Moldovanu 2004).These issues Jay R. Corrigan is an associate professor, department of Eco- nomics, Kenyon College, Gambier, Ohio. Matthew C. Rousu is an associate professor, department of Economics, Susquehanna Uni- versity, Selinsgrove, Pennsylvania. The authors thank Greg Colson and Jayson Lusk for their helpful comments. Corrigan and Rousu share lead authorship. This article was presented during an invited paper session at the 2010 AAEA annual meeting in Denver, Col- orado. The articles in these sessions are not subject to the journal’s standard refereeing process. are of primary importance, for example, to policy-makers designing a radio spectrum auc- tion where firms with heterogeneous costs compete to buy one common value good. But efficiency and revenue are less important in the experimental auction valuation literature (e.g., Lusk and Shogren 2007). What is impor- tant here is the extent to which bids provide an accurate and unbiased reflection of auction participants’ underlying value signals. Value affiliation could arise in an experimen- tal auction environment in a number of ways. For example, participants may be certain of the value they place on the good up for auction, but uncertain of the price the good sells for in the field. Recognizing that auction bids should not exceed the field price (Harrison, Harstad, and Rutström 2004), censored values become affil- iated if participants believe their competitors possess additional information about the true field price. Alternatively, auction participants may “mark down” the value of any good sold in an experimental auction because of concerns about whether the good will actually be delivered at the end of the auction, or about the quality of that good relative to field substi- tutes. Marked down values become affiliated if participants believe their competitors possess additional information about the auction market’s credibility. Still another possibility is that while auc- tion participants may be certain of the value they would derive from a conventional good, they may be uncertain of the value they would derive from a similar good endowed with some novel trait. One example would be a comparison of conventional fresh pro- duce with locally grown fresh produce. The “locally grown” designation could take on Amer. J. Agr. Econ. 93(2): 514–520; doi: 10.1093/ajae/aaq140 © The Author (2011). Published by Oxford University Press on behalf of the Agricultural and Applied Economics Association. All rights reserved. For permissions,please e-mail: journals.permissions@oup.com