An Experimental Test of Precautionary Bidding
AbstractAuctions often involve goods exhibiting a common knowledge ex-post risk that is independent of buyers’ private values or their signals regarding common value components. Esö and White (2004) showed theoretically that ex-post risk leads to precautionary bidding for DARA bidders: Agents reduce their bids by more than their appropriate risk premium. Testing precautionary bidding with data from the field seems almost impossible. We conduct experimental first-price auctions that allow us to directly identify the precautionary premium and find clear evidence for precautionary bidding. Bidders are significantly better off when a risky object rather than an equally valued sure object is auctioned. Our results are robust if we control for potentially confounding decision biases.
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Bibliographic InfoPaper provided by University of Munich, Department of Economics in its series Discussion Papers in Economics with number 11743.
Date of creation: Aug 2010
Date of revision:
precautionary bidding; prudence; auction; experiment;
Other versions of this item:
- Martin G. Kocher & Julius Pahlke & Stefan T. Trautmann, 2010. "An experimental test of precautionary bidding," Working Paper series, University of East Anglia, Centre for Behavioural and Experimental Social Science (CBESS) 10-08, School of Economics, University of East Anglia, Norwich, UK..
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-08-21 (All new papers)
- NEP-EXP-2010-08-21 (Experimental Economics)
- NEP-GTH-2010-08-21 (Game Theory)
- NEP-UPT-2010-08-21 (Utility Models & Prospect Theory)
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