Herding and the winner's curse in markets with sequential bids

We present a model of social learning in an environment with common values where informational cascades and herding arise in combination with the winn er's curse. A seller of an object sequentially obtains bids from potential buyers. We characterize three classes of equilibria that differ widely in t heir information aggregation properties and in the size of the rent the sel ler captures from the buyers. We compare the procedure of sequentially soli citing bids from the buyers to conducting an English auction for the object in terms of maximization of seller's revenue and demonstrate the superiori ty of the former. (C) 1999 Academic Press.