Precautionary Bidding in Auctions.
We analyze bidding behavior in auctions when risk-averse buyers bid for a good whose value is risky. We show that when the risk in the valuations increases, DARA bidders will reduce their bids by more than the appropriate increase in the risk premium. Ceteris paribus, buyers will be better off biddi...
| Main Authors: | , |
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| Format: | Journal article |
| Language: | English |
| Published: |
Econometric Society
2004
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| _version_ | 1826262510456537088 |
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| author | Eső, P White, L |
| author_facet | Eső, P White, L |
| author_sort | Eső, P |
| collection | OXFORD |
| description | We analyze bidding behavior in auctions when risk-averse buyers bid for a good whose value is risky. We show that when the risk in the valuations increases, DARA bidders will reduce their bids by more than the appropriate increase in the risk premium. Ceteris paribus, buyers will be better off bidding for a more risky object in first price, second price, and English auctions with affiliated common (interdependent) values. This "precautionary bidding" effect arises because the expected marginal utility of income increases with risk, so buyers are reluctant to bid so highly. We also show that precautionary bidding behavior can make DARA bidders prefer bidding in a common values setting to bidding in a private values one when risk-neutral or CARA bidders would be indifferent. Thus the potential for a "winner's curse" can be a blessing for rational DARA bidders. |
| first_indexed | 2024-03-06T19:37:19Z |
| format | Journal article |
| id | oxford-uuid:1f78d122-907b-4861-aeee-88a8aa0e9dbb |
| institution | University of Oxford |
| language | English |
| last_indexed | 2024-03-06T19:37:19Z |
| publishDate | 2004 |
| publisher | Econometric Society |
| record_format | dspace |
| spelling | oxford-uuid:1f78d122-907b-4861-aeee-88a8aa0e9dbb2022-03-26T11:22:04ZPrecautionary Bidding in Auctions.Journal articlehttp://purl.org/coar/resource_type/c_dcae04bcuuid:1f78d122-907b-4861-aeee-88a8aa0e9dbbEnglishDepartment of Economics - ePrintsEconometric Society2004Eső, PWhite, LWe analyze bidding behavior in auctions when risk-averse buyers bid for a good whose value is risky. We show that when the risk in the valuations increases, DARA bidders will reduce their bids by more than the appropriate increase in the risk premium. Ceteris paribus, buyers will be better off bidding for a more risky object in first price, second price, and English auctions with affiliated common (interdependent) values. This "precautionary bidding" effect arises because the expected marginal utility of income increases with risk, so buyers are reluctant to bid so highly. We also show that precautionary bidding behavior can make DARA bidders prefer bidding in a common values setting to bidding in a private values one when risk-neutral or CARA bidders would be indifferent. Thus the potential for a "winner's curse" can be a blessing for rational DARA bidders. |
| spellingShingle | Eső, P White, L Precautionary Bidding in Auctions. |
| title | Precautionary Bidding in Auctions. |
| title_full | Precautionary Bidding in Auctions. |
| title_fullStr | Precautionary Bidding in Auctions. |
| title_full_unstemmed | Precautionary Bidding in Auctions. |
| title_short | Precautionary Bidding in Auctions. |
| title_sort | precautionary bidding in auctions |
| work_keys_str_mv | AT esop precautionarybiddinginauctions AT whitel precautionarybiddinginauctions |