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A pure variation of risk in first-price auctions

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  • Oliver Kirchkamp

    ()
    (University of Jena, School of Economics)

  • J. Philipp Reiß

    ()
    (Maastricht University, Economics Department)

  • Abdolkarim Sadrieh

    ()
    (University of Magdeburg, Faculty of Economics and Management)

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 a?ects bidding behavior as generally expected in auction theory. While resolving a long-standing debate on the e?ect 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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Bibliographic Info

Paper provided by Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics in its series Jena Economic Research Papers with number 2008-024.

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Date of creation: 19 Mar 2008
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Handle: RePEc:jrp:jrpwrp:2008-024

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Keywords: risk; fist-price auctions; risk-aversion; overbidding;

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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.
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Cited by:
  1. Shupp, Robert & Sheremeta, Roman, 2013. "Resource Allocation Contests: Experimental Evidence," MPRA Paper 49889, University Library of Munich, Germany.
  2. J. Philipp Reiß & Irenaeus Wolff, 2012. "Incentive Effects of Funding Contracts: An Experiment," Working Paper Series of the Department of Economics, University of Konstanz 2012-26, Department of Economics, University of Konstanz.
  3. Oliver Kirchkamp & Eva Poen & J. Philipp Reiß, 2008. "Outside options: Another reason to choose the first-price auction," Jena Economic Research Papers 2008-022, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
  4. Tibor Neugebauer & Sascha Fllbrunn, 2013. "Varying the number of bidders in the first-price sealed-bid auction: experimental evidence for the one-shot game," LSF Research Working Paper Series 13-10, Luxembourg School of Finance, University of Luxembourg.
  5. Sascha Füllbrunn & Tibor Neugebauer, 2013. "Varying the number of bidders in the first-price sealed-bid auction: experimental evidence for the one-shot game," Theory and Decision, Springer, vol. 75(3), pages 421-447, September.

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