Proceedings of the 5 th ESEA Conference
Edited By Oliver Budzinski and Arne Feddersen
The Winner’s Curse in Sports Economics
A sports entity often maximizes its monopoly rent in creating an auction-like situation among competing agents for its exclusive product. The latter overbid up to the most optimistic bidder’s price. Here comes the winner’s curse whenever the market value of the auctioned object is unknown ex ante. The most optimistic bidder wins the bid and its actual net revenues will be lower than expected. A winner’s curse occurs in bids for hosting a mega-sporting event, when several cities compete to host a team franchise, TV channels bid for a league’s broadcasting rights, and teams overbid for recruiting a same free agent or superstar player.
winner’s curse, auction bid, cost overruns, asymmetric information, sports economics.
In any auction-type setting where the value of the auctioned object is uncertain but will turn out to be the same for all bidders, the party that overestimates the value of the object is likely to outbid its competitors and win the contest. This defines a common value auction1 where the item to be sold has a single objective value for all bidders, but this true value is unknown. Each bidder has to guess the item’s true value at the time of bidding on basis of the information that is available, and without knowing the other’s guesses. The items won are more often than not those whose value has been overestimated. The winner’s curse occurs in common value auctions when bidders fail to account for the fact that the winner’s valuation of...
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