Solutions to Chapter 17 Exercises
SOLVED EXERCISES
S1.
The painter can compare her estimated cost to a job’s true cost only when she does the job. But
the painter does a job only when she agrees (through the bidding process) to do it for less than anybody
else would charge. The fact that she submitted the lowest bid suggests that this is a job for which the
painter has likely underestimated the real cost. This is therefore a winner’s curse; the painter only wins
contracts that tend to cost more than she expected.
S2.
If you turn out to be the lowest bidder and therefore fail to get the object, this must be because all
of the others got a higher estimate of the value of the object than you did. Therefore you have reason to
believe that you got an exceptionally low estimate—one with a large and negative error. This is a “loser’s
curse,” just like the winner’s curse that occurs when only one object is auctioned among many bidders,
and you are the highest bidder only if you get an exceptionally high estimate. You will correct for this
loser’s curse by bidding somewhat more aggressively than would be justifiable on the basis of your own
estimate alone. The precise calculation of course requires more information on the probability distribution
of the errors, and so on. [See Wolfgang Pesendorfer and Jeroen Swinkels, “The Loser’s Curse and
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 Spring '08
 Charness,G
 Game Theory, Auction, best response

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