Risk aversion and optimal reserve prices in first- and second-price auctions

Hu, Audrey; Matthews, Steven A.; Zou, Liang

doi:10.1016/j.jet.2010.02.006

Cited by 66 publications

(49 citation statements)

References 19 publications

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“…Also shown are the 45 degree line, which would correspond to subjects bidding exactly their value, and three different equilibrium bidding lines, which result from applying the equilibrium bid function (5) to the various -values corresponding to the choices from the Holt-Laury questionnaire. 9 In particular, the top panel of Figure 4 shows exit prices for risk averse bidders, i.e. subjects that chose the safe lottery 7, 8, or 9 times on the Holt-Laury questionnaire.…”

Section: Resultsmentioning

confidence: 99%

Premium auctions and risk preferences: An experimental study

Brunner

Oechssler

2014

Games and Economic Behavior

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In premium auctions, the highest losing bidder receives a reward from the seller. This paper studies the English premium auction (EPA) for the canonical case of symmetric private values with risk averse and risk loving bidders. We explicitly derive the symmetric equilibrium for bidders with CARA utilities and conduct an experimental study to test the theoretical predictions. In our experiment, subjects are sorted into risk-averse and risk loving groups using the method proposed by Holt and Laury (2002). Each group is invited to separate sessions and we find that revenue in the EPA is significantly higher when bidders are risk loving rather than risk averse. These results are partly consistent with theory and confirm the general view that bidders' risk preferences constitute an important factor that affects bidding behavior and consequently also the seller's expected revenue. However, individual subjects rarely follow the equilibrium strategy and as a result, revenue in our experiment is lower than in the symmetric equilibrium.JEL-classification numbers: D44, C92.

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Section: Resultsmentioning

confidence: 99%

Premium auctions and risk preferences: An experimental study

Brunner

Oechssler

2014

Games and Economic Behavior

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“…Papers relating to the analysis of risk aversion in general winner-pay auction environments are Maskin and Riley (1984) and Matthews (1987), both discussing risk-averse bidders' behaviour in auctions, Esö and White (2004), analysing precautionary bidding in auctions, and Esö and Futó (1999), who derive the revenue-optimal strategy for a risk-averse seller, and Hu, Matthews, and Zou (2010) who discuss reserve prices. The existing analyses of asymmetric auctions, for instance Amann and Leininger (1996), Lizzeri and Persico (2000), Maskin and Riley (2000), Fibich, Gavious, and Sela (2004), Parreiras and Rubinchik (2010), Kirkegaard (2012), or Kaplan and Zamir (2012), typically employ asymmetric distributions (or supports) while we use our idiosyncratic varianceaversion parameter.…”

Section: Literaturementioning

confidence: 99%

Auctioning Risk: The All-Pay Auction under Mean-Variance Preferences

Klose

Schweinzer

2012

SSRN Journal

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We analyse the all-pay auction with incomplete information and variance-averse bidders. We characterise the symmetric equilibrium for general distributions of valuations and any number of bidders. Variance aversion is a sufficient assumption to predict that high-valuation bidders increase their bids relative to the risk-neutral case while low types decrease their bid. Considering an asymmetric two-player environment with uniform valuations, we show that a more variance-averse type always bids higher than her less variance-averse counterpart. Taking mean-variance bidding behaviour as given, we show that an expected revenue maximising seller may want to optimally limit the number of participants. (JEL C7, D7, D81.

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“…In first price auctions risk aversion also tends to reduce the optimal reserve price because aggressive bidding does not have to be induced with the help of a high reserve price (Riley and Samuelson (1981), Hu, Matthews, and Zou (2010)). Knowing bidders' risk aversion is therefore crucial for auction design.…”

Section: Introductionmentioning

confidence: 99%

Identification and Estimation of Risk Aversion in First Price Auctions With Unobserved Auction Heterogeneity

Grundl

Zhu

2015

FEDS

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We extent the point-identification result in Guerre, Perrigne, and Vuong (2009) to environments with one-dimensional unobserved auction heterogeneity. In addition, we also show a robustness result for the case where the exclusion restriction used for point identification is violated: We provide conditions to ensure that the primitives recovered under the violated exclusion restriction still bound the true primitives in this case. We propose a new Sieve Maximum Likelihood Estimator, show its consistency and illustrate its finite sample performance in a Monte Carlo experiment. We investigate the bias in risk aversion estimates if unobserved auction heterogeneity is ignored and explain why the sign of the bias depends on the correlation between the number of bidders and the unobserved auction heterogeneity. In an application to USFS timber auctions we find that the bidders are risk neutral, but we would reject risk neutrality without accounting for unobserved auction heterogeneity. * We are very grateful to Amit Gandhi and Jack Porter for their advise and many helpful suggestions. We would also like to thank Andrés Aradillas-López, Bruce Hansen and Xiaoxia Shi for their helpful comments. Serafin Grundl: Federal Reserve Board of Governors, serafin.j.grundl@frb.gov. Yu Zhu: Department of Economics, University of Leicester, yz317@leicester.ac.uk. The analysis and conclusions set forth are those of the authors and do not indicate concurrence by other members of the staff, by the Board of Governors, or by the Federal Reserve Banks.

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Risk aversion and optimal reserve prices in first- and second-price auctions

Cited by 66 publications

References 19 publications

Premium auctions and risk preferences: An experimental study

Premium auctions and risk preferences: An experimental study

Auctioning Risk: The All-Pay Auction under Mean-Variance Preferences

Identification and Estimation of Risk Aversion in First Price Auctions With Unobserved Auction Heterogeneity

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