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A pure variation of risk in first-price auctions

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Author Info
Kirchkamp, Oliver
Reiss, J. Philipp
Sadrieh, Abdolkarim (METEOR)

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Abstract

We introduce a new method of varying the risk that bidders face in first-price private value auctions. We find that decreasing bidders’ risk significantly reduces the degree of overbidding relative to the risk-neutral Bayesian-Nash equilibrium prediction. This implies that risk affects bidding behavior as generally expected in auction theory. While resolving a long-standing debate on the effect of risk on auction behavior, our results give rise to a new puzzle. As risk is diminished and overbidding decreases for most of the value range, a significant degree of underbidding sets in for very low values

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Paper provided by Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization in its series Research Memoranda with number 058.

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Date of creation: 2006
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Handle: RePEc:dgr:umamet:2006058

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Keywords: Economics (Jel: A);

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  1. Cox, James C & Smith, Vernon L & Walker, James M, 1985. "Experimental Development of Sealed-Bid Auction Theory: Calibrating Controls for Risk Aversion," American Economic Review, American Economic Association, vol. 75(2), pages 160-65, May. [Downloadable!] (restricted)
  2. Smith, Vernon L & Walker, James M, 1993. "Rewards, Experience and Decision Costs in First Price Auctions," Economic Inquiry, Oxford University Press, vol. 31(2), pages 237-45, April.
  3. Kirchkamp, Oliver & Reiß, J. Philipp, 2004. "The overbidding-myth and the underbidding-bias in first-price auctions," Sonderforschungsbereich 504 Publications 04-32, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim. [Downloadable!]
  4. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December. [Downloadable!]
  5. Kagel, J.H. & Levin, D., 1988. "Independent Private Value Auctions: Bidder Behavior In First, Second And Third-Price Auctions With Varying Numbers Of Bidders," Papers 13, Houston - Department of Economics.
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  6. Brosig, Jeannette & Rei[ss], J. Philipp, 2007. "Entry decisions and bidding behavior in sequential first-price procurement auctions: An experimental study," Games and Economic Behavior, Elsevier, vol. 58(1), pages 50-74, January. [Downloadable!] (restricted)
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  1. Reiss, J. Philipp & Wolff, Irenaeus, 2007. "Non-monotonic Repayment Contracts are Superior: An Experimental Approach," Research Memoranda 053, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization. [Downloadable!]
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