Engelmann, Dirk Frank, Jeff Koch, Alexander K. Valente, Marieta
Year of Publication:
Discussion Paper 237
Winners in online auctions frequently fail to complete purchases. Major auction platforms therefore allow "second-chance" offers, where the runner-up bidder pays his own bid price, and they let sellers leave negative feedback on buyers who default. We show theoretically that (i) all else equal, the availability of second-chance offers reduces bids; (ii) sellers have no incentive to exclude bidders, even if they are nearly certain to default; (iii) buyer reputation systems reward bidders with a reputation for defaulting, counter to the idea of deterring such behavior. Our auction experiments support these predictions and provide insights on their practical relevance.