English Versus Vickrey Auctions with Loss Averse Bidders

It is well known that people evaluate outcomes relative to expectations. I analyze this expectation-based loss aversion [Kőszegi and Rabin (2006, 2009)] in the context of dynamic and static auctions, allowing the reference point to be the (endogenuous) equilibirium outcome. If agents update their reference point during the auction, the evelation of information crucially affects equilibrium behavior. Consequently, I show that – even with independent private values – the Vickrey auction yields stricty higher revenue than the English auction, violating the well known revenue equivalence. Thus, dynamic loss aversion offers a novel explanation for the empirically established differences between the two auction formats.