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16 January, 10:30

In which of the following scenarios is the winner of the auction LEAST likely to suffer from the winner's curse?

- A son winning his mother's favorite painting to give her for her birthday.

- A diamond dealer placing the winning bid for a set of stones on the diamond exchange.

- A construction company bidding on a contract to build a new apartment complex.

- A restaurant bidding on a prime NYC location.

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  1. 16 January, 11:49
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    The correct answer is - A son winning his mother's favorite painting to give her for her birthday.

    Explanation:

    The winner's curse is a phenomenon that can occur in common value auctions with incomplete information. In short, the winner's curse says that at auction, the winner will tend to pay more. The winner may overpay or be "cursed" in one of two ways: 1) the winning bid exceeds the value of the auctioned good so that the winner is the worst in absolute terms, or 2) the value of the asset is less than the one expected by the bidder, so the bidder may still have a net gain, but it will be worse than expected. However, generally the overpayment will occur only if the winner does not take into account the winner's curse when making an offer (a result that, according to the income equivalence theorem, will not necessarily occur).

    In this type of auction, the valuation of the product by the buyer does not depend on the valuations and / or information of others.
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