Occurs when a winning bidder unintentionally underestimates his true costs. In reality, bidders do not know their exact costs prior to the An auction is a market mechanism with the aims of allocating... More. Some cost components are unknown and only the probability distribution of the costs is common knowledge.
Usually this unknown cost component is common to all bidders. An example might be future PV module prices. The bidders do not know these costs exactly, but they make an estimate. Furthermore, all bidders need modules, so this cost component affects them all. Under such circumstances, the Winner’s Curse will occur if the winning bidder wins the An auction is a market mechanism with the aims of allocating... More not because he actually has the lowest costs, but because he has the most optimistic estimate for the unknown costs and hence the lowest bid.
The estimate is most probably below the actual costs (being the lowest estimate) and hence the winning bidder may make a loss. Theoretically, rational bidders include this risk in their bid and the Winner’s Curse does not occur. In practice however, it does occur. The lower the Just like administratively set support, auction-allocated su... More level resulting from the An auction is a market mechanism with the aims of allocating... More, the higher the probability of the Winner’s Curse under the assumption that the same bidder wins the An auction is a market mechanism with the aims of allocating... More. Winning projects struck by the Winner’s Curse face a high risk of non-realisation.
The auctioneer should thus implement pre-qualifications and penalties.