Predicting the Winner's Curse

If quantity uncertainty exists in a first price auction that specifies a fixed bid, a participant must answer two questions when evaluating a candidate bid: “What are my chances of winning?” and “What is the effect of the winner's curse on my quantity estimate?” The winner's curse is the tendency of the winner of a first-price sealed-bid auction to be the bidder that most overvalues the items being offered. When value uncertainty is due to quantity uncertainty, the winner's curse implies that the bidder that most overestimates the quantity tends to win. Thus, if there is quantity uncertainty, a participant must adjust its bid for this tendency to overestimate quantities. This paper presents an empirical method to answer the above questions by estimating a predictive distribution of the highest competing bid and the quantity bias caused by the winner's curse. The method is developed for timber auctions but is general to auctions where a fixed bid is called for and there is uncertainty in the mix and quantities of items being offered. An example that uses data from timber auctions is used to demonstrate the method.     

ON THE COST OF NEW ISSUES OF COMMON STOCK: AN AMENDMENT TO THE CONSTANT GROWTH MODEL

Expansion decisions by corporate managements are importantly influenced by their perceptions of the firm's cost of capital and especially the cost of common equity. Their decision making is then influenced by the common perception that new issues of common stock are more costly than retained earnings because of the flotation costs inherent in new issues. Thus a rate of expansion that requires new issues is downgraded in decision making. In this paper the authors show that in actuality new issues of common equity may be less costly than retained earnings. Thus different decision-making implications are clearly involved.