ch17_solutions_solved edit

ch17_solutions_solved edit - Solutions to Chapter 17...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
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
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 08/08/2011 for the course ECON 171 taught by Professor Charness,g during the Spring '08 term at UCSB.

Page1 / 4

ch17_solutions_solved edit - Solutions to Chapter 17...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online