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Effects of risk aversion on all-pay auction with reimbursement

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  • Liu, Yong
  • Liu, Shulin

Abstract

This paper investigates all-pay auctions with winner’s reimbursement and risk-averse contestants. Assuming the contestants share a general concave utility function, we obtain analytical solutions for the contestants’ symmetrical equilibrium effort and the contest organizer’s expected revenue. We show that both the equilibrium effort and expected revenue are lower when the contestants are risk averse than when they are risk neutral, and decrease in the degree of risk aversion. These results imply that with winner’s reimbursement, the contestant organizer prefers risk-neutral contestants to risk-reverse contestants and contrast with those obtained in the standard first-price sealed-bid auctions.

Suggested Citation

  • Liu, Yong & Liu, Shulin, 2019. "Effects of risk aversion on all-pay auction with reimbursement," Economics Letters, Elsevier, vol. 185(C).
    • Handle: RePEc:eee:ecolet:v:185:y:2019:i:c:s0165176519303775
    DOI: 10.1016/j.econlet.2019.108751
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    References listed on IDEAS

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    1. Kaplan, Todd, et al, 2002. "All-Pay Auctions with Variable Rewards," Journal of Industrial Economics, Wiley Blackwell, vol. 50(4), pages 417-430, December.
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    4. March, Christoph & Sahm, Marco, 2018. "Contests as selection mechanisms: The impact of risk aversion," Journal of Economic Behavior & Organization, Elsevier, vol. 150(C), pages 114-131.
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    9. Matros, Alexander, 2012. "Sad-Loser contests," Journal of Mathematical Economics, Elsevier, vol. 48(3), pages 155-162.
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    12. Liqun Liu & Jack Meyer & Andrew J. Rettenmaier & Thomas R. Saving, 2018. "Risk and risk aversion effects in contests with contingent payments," Journal of Risk and Uncertainty, Springer, vol. 56(3), pages 289-305, June.
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    14. Minchuk, Yizhaq, 2018. "Effect of reimbursement on all-pay auction," Economics Letters, Elsevier, vol. 172(C), pages 28-30.
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    Cited by:

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    2. Konstantinos Protopappas, 2023. "Manipulation of moves in sequential contests," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 61(3), pages 511-535, October.

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    More about this item

    Keywords

    All-pay auctions; Reimbursement; Risk aversion;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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