Is Charity Rational?
https://www.coloradopolitics.com/quick-hits/license-plate-auction-raises-thousands-for-colorado-disability-fund/article_d7b3ac84-ee91-11e9-8acd-0fa6e8d0081d.html
Earlier this month, the Colorado state government held an auction of specialty license plate configurations to support the state’s Disability Funding Committee. The proceeds of the auction went towards the development of innovative programs that benefit the community of disabled persons in Colorado. Over $23,000 was raised during the event, which took the form of a silent auction where bids were written on pieces of paper and the highest bidder at the end of the auction won the item.
We’ve thoroughly discussed auctions in lecture and we’ve framed them as games similar to prisoner’s dilemma because the concepts of Nash equilibrium and dominant strategies still apply. We’ve also made several assumptions: the first, the auction must include a single object; the second, the buyers only know their own value, but not the value of other’s; and the third, the values of bidders are independent and private. The silent auction, otherwise known as a first price auction, in the article satisfies the assumptions above meaning we can investigate the logic behind the decisions of the bidders.
Of the many license plates sold during the auction, a plate labeled “Itsfast” received 95 bids and sold for $4,005. The average cost of attaining a specialty Colorado license plate is under $200. During a first price auction, it is a dominant strategy to bid below your true value for the object. This is true because if the bidder bids exactly their true value and wins the auction, they would not gain any positive value from the object. And if the same bidder bids above their true value and wins, they will have to pay that value and essentially lose because the cost of the object exceeded the value of it. The bidder would be better off bidding below their true value because they might have a positive gain if they won the auction.
So, why did at least one bid for the “Itsfast” license plate exceed the market value for a similar license plate?
Charity. The bidders’ value for the specialty license plates weren’t anchored in the cost, but rather the intrinsic benefit of doing good. Therefore, we can consider their actions to be rational.