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Precautionary Bidding: First Price Auctions with Stochastic Private Values

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  • Peter Eso

    (Harvard University)

  • Lucy White

    (Oxford University)

Abstract

We analyse a first-price auction where risk-averse bidders bid for an object whose value is risky. Using a private values setting, we provide the first analysis of the pure comparative statics of risk in auctions. We show that as risk increases, decreasingly risk-averse bidders will reduce their bids by more than the risk premium. Ceteris paribus, bidders will be better off bidding for a more risky object. This effect arises because as risk increases, so does the expected marginal utility of income, so bidders are reluctant to bid so highly. Even in the presence of this effect, the expected revenue of a first price auction remains higher than that of a second price auction. We show how this result extends to common values.

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1116.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:1116

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  1. Ross, Stephen A, 1981. "Some Stronger Measures of Risk Aversion in the Small and the Large with Applications," Econometrica, Econometric Society, vol. 49(3), pages 621-38, May.
  2. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
  3. J. Riley & E. Maskin, 1981. "Optimal Auctions with Risk Averse Buyers," Working papers 311, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. EECKHOUDT, Louis & Christian GOLLIER & Harris SCHLESINGER, 1994. "Changes in Background Risk and Risk Taking Behavior," Working Papers 005, Risk and Insurance Archive.
  5. Miles S. Kimball, 1991. "Standard Risk Aversion," NBER Technical Working Papers 0099, National Bureau of Economic Research, Inc.
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