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Download the Paper (581 K, PDF file) - November 1, 2005 Tell a colleague about it. Printing Tips: Select 'print as image' in the Acrobat print dialog if you have trouble printing.

ABSTRACT:
This paper proposes a structural non-equilibrium model of initial responses to incomplete-information games based on "level-k" thinking, which describes behavior in many experiments with complete-information games. We derive the model's implications in first- and second-price auctions with general information structures, compare them to equilibrium and Eyster and Rabin's (2005) "cursed equilibrium," and evaluate the model's potential to explain behavior in auction experiments. The level-k model generalizes many insights from equilibrium auction theory. It also allows a unified explanation of the winner’s curse in common-value auctions and overbidding in those independent-private-value auctions without the uniform value distributions used in most experiments.

SUGGESTED CITATION:
Vincent P. Crawford and Nagore Iriberri, "Level-k Auctions: Can a Non-Equilibrium Model of Strategic Thinking Explain the Winner's Curse and Overbidding in Private-Value Auctions?" (November 1, 2005). Department of Economics, UCSD. Paper 2005-13.
http://repositories.cdlib.org/ucsdecon/2005-13