Reference dependence, expectations and anchoring in the Becker-DeGroot-Marschak Mechanism

Abstract

We explore several behavioral issues associated with bidding behavior in the Becker-DeGroot-Marschak (BDM) mechanism; a popular mechanism in experimental economics and valuation research. By manipulating the random binding price and framing, we find that bids are affected by the choices made by experimenters. Our theoretical framework, shows that the treatment effects are consistent with an attachment to expectations-based reference points, anchoring on the highest price, as well as the no-loss-in-buying hypothesis of Novemsky and Kahneman (2005). Overall, our theory and experimental results confirm that the mechanism is not incentive compatible and thus previous results regarding product valuations, as well as various treatment effects identified using the mechanism, should be interpreted as conditional on the particular choice of design variables.

Publication
Theory and Decision (forthcoming)
Andreas C. Drichoutis
Andreas C. Drichoutis
Associate Professor of Consumer Behavior

His research interests are focused on decision making across a broad spectrum of topics pertinent to agricultural/food economics. His contributions are notably diversified spanning the area of contingent valuation and experimental auctions methods, choice under risk, inter-temporal decision making and applied demand analysis. Most of his research applies experimental economics methods to answer questions relevant to agricultural economists and decision scientists.