Signaling in auctions and mechanisms: theory and experimental evidence – SIGNAL

There is an old puzzle in art economics: why does art investment systematically underperform equity markets? A possible explanation, proposed by Mandel (2009), is that individuals have three different motives for buying art: investment, direct consumption and signaling. In the later, the owner can enjoy its aesthetic qualities but also the prestige from showing it to friends and acquaintances. The underperformance of art is particularly important for famous master-pieces (Mei and Moses, 2002), which are likely to have a greater signaling value. The signaling motive is also present in charity auctions, in which funds are raised by auctioning objects once owned by celebrities. The recent literature on charity auctions (Carpenter et al., 2008) suggests that signaling and status motives explain better bidders’ behavior than altruistic preferences. Moreover, the mechanism of auctioning celebrities’ belongings seems to exploit signaling motives: potential donators only need to buy one object during a public event to get a warm glow and the benefit of a good public image. Finally, the public behavior of any sizable firm is under constant scrutiny by market analysts and other market parties. A firm’s bidding behavior in an auction, regardless of the outcome of the auction, is informative to outsiders trying to assess the value of the firm or the quality of the managers.

In all these auctions, bidders care not only about winning the auction, but also about the information conveyed to others by their behavior. These inferences by outsiders about the bidders’ private information crucially depend on the design of the auction, and in turn affect the equilibrium bidding strategies and thus the outcome of the auction. For example, the information revealed in dynamic auctions differs substantially from static sealed-bid auctions. Therefore, these previous three examples require a full signaling games analysis. We want to advance and deepen our understanding of mechanisms, such as auctions but not only, in which participants care about the outsiders’ beliefs on their type. We would like to use this knowledge to provide new perspectives on classical topics on mechanism and organization design, such as regulation (public procurement) and allocation mechanisms used in organizations (charitable organizations, art auction houses).

Our analysis will be theoretical and experimental. First we will investigate how signaling in combination of dynamic auctions affects the inferences by outsiders and thereby the bidding behaviour and revenue properties. Despite a notable exception about the minimal information English auction studied by Bos and Truyts (2018) there is no result about dynamic auctions. This will complement available results on static auctions. Second, the current literature (e.g. Giovannoni and Makris 2014, Bos and Truyts 2018) compares specific auction formats with signaling concerns, but does not provide a full fledged mechanism design analysis. It is hence open questions. What an optimal mechanism is? Is it still an auction that allocates the good to the highest value bidder? Then, which auction format is it? Does it pay off to not efficiently allocate the object sold?