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Risk aversion, risk sharing, and joint bidding: a study of outer continental shelf petroleum auctions

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  • Steven W. Millsaps
  • Mack Ott
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    Abstract

    The bidding decision by firms in OCS petroleum auctions is modeled as an application of the Arrow-Pratt theory of risk aversion. This theory is apt since OCS leases are innately risky investments: during 1954-1969, 77 percent of the Gulf of Mexico leases were unprofitable, while the average bonus (price) was $2,228,000. The model of the simultaneous choices of bid level, share in joint bids, and bids on other tracts in the same auction is tested on 17 auctions during 1968-1975. Empirical results support the hypothesis of decreasing absolute risk aversion and the risk-pooling explanation of joint bidding.

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    File URL: http://research.stlouisfed.org/wp/1985/1985-014.pdf
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    Bibliographic Info

    Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 1985-014.

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    Date of creation: 1985
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    Publication status: Published in Land Economics, November 1985, 61(4), pp. 372-86
    Handle: RePEc:fip:fedlwp:1985-014

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    1. Masson, Robert Tempest, 1971. "Executive Motivations, Earnings, and Consequent Equity Performance," Journal of Political Economy, University of Chicago Press, vol. 79(6), pages 1278-92, Nov.-Dec..
    2. Hayne E. Leland., 1975. "Optimal Risk Sharing and the Leasing of Natural Resources, with Application to Oil and Gas Leasing on the OCS," Research Program in Finance Working Papers 38, University of California at Berkeley.
    3. Samuelson, Paul A, 1977. "St. Petersburg Paradoxes: Defanged, Dissected, and Historically Described," Journal of Economic Literature, American Economic Association, vol. 15(1), pages 24-55, March.
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