Explain why it is unwise to bid more than your valuation of the good i

Explain why it is unwise to bid more than your valuation of the good in a sealed bid second-price auction.

What will be an ideal response?

ANSWER

Assume you have a valuation of the good equal to $50. The price the winning bidder pays is equal to the second highest bid. If you bid $70 and win you will pay less than $50 if the second-highest bid (SHB) is less or equal to $50. In this case you are as well off as bidding $50. If you end up paying more you lose because you are paying more than your valuation of the good. So you are either as well off or worse off than bidding your highest valuation.