Do Irrelevant Payo¤s A¤ect Behavior When Dominant Strategy is Available: Experimental Evidence from Second-Price Auctions

Bidding one’s value in a second-price auction with private valuations is a dominant solution (Vickrey, 1961). However, repeated experimental studies …nd much more overbidding than underbidding, resulting in overbidding on average. In our experimental work we introduce manipulations against which the dominant strategy is immune, yet they a¤ect bidding in a predictable way. The strong …nding suggests that, although subjects fail to discover the dominant strategy, they nevertheless respond in a conventional way to the “steepness” of payo¤s out of equilibrium. The study also alerts us that, when implementing mechanisms, we must recognize that less than fully rational players will respond to incentives that a¤ect out of equilibrium play.