Premium auctions and risk preferences

How Risk Sharing May Enhance Efficiency of English Auctions

“…The proof of this Proposition is similar to Hu et al (2011b, Step 4 of the proof of Theorem 2); hence it is omitted. One can easily see from (5)-(6) that b is a smooth function of a (e.g.…”

“…We now examine the symmetric equilibriums of the EPA. A detailed description of the EPA equilibrium can be found in Hu et al (2011b). Here, we derive the EPA equilibrium heuristically, assuming (and verifying later) that bidders adopt increasing and differentiable bid functions in every stage of the auction.…”

“…In light of a result in Hu et al (2011b) that the premium lowers expected revenue when bidders are risk averse, Proposition 4 suggests a strong risk-sharing effect of the premium: even though the expected revenue is lower, the seller may prefer the EPA for the reduction of revenue risk. In fact, as will be shown in Proposition 6, the condition that the seller is more risk averse than the bidders is not necessary for this conclusion.…”

“…Hu et al (2011b) considered a more general premium rule that is an increasing, but not necessarily linear, function of p À X. The simple linear premium rules, however, are used predominantly in practice(Goeree and Offerman, 2004).…”

Premium auctions in the field

“…Experimental evidence in symmetric settings or settings with weak asymmetries is in line with this finding (Goeree and Offerman 2004;Hu et al 2011a). In theoretical work, Hu et al (2011b) find that the Amsterdam auction generates higher [lower] revenue than the English auction in the case of riskseeking [risk-averse] bidders. Brunner et al's (2014) confirm this prediction in a laboratory experiment, although bids in the Amsterdam auction are less aggressive than predicted by theory.…”