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Risk Aversion and Optimal Reserve Prices in First and Second-Price Auctions, Second Version

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Author Info

  • Audrey Hu

    ()
    (Tinbergen Institute University of Amsterdam)

  • Steven A. Matthews

    ()
    (Department of Economics, University of Pennsylvania)

  • Liang Zou

    ()
    (Faculty of Economics and Business, University of Amsterdam)

Abstract

This paper analyzes the effects of buyer and seller risk aversion in first and second-price auctions. The setting is the classic one of symmetric and independent private values, with ex ante homogeneous bidders. However, the seller is able to optimally set the reserve price. In both auctions the seller’s optimal reserve price is shown to decrease in his own risk aversion, and more so in the first-price auction. Thus, greater seller risk aversion increases the ex post efficiency of both auctions, and especially that of the first-price auction. The seller’s optimal reserve price in the first-price, but not in the second-price, auction decreases in the buyers’ risk aversion. Thus, greater buyer risk aversion also increases the ex post efficiency of the first but not the second-price auction. At the interim stage, the first-price auction is preferred by all buyer types in a lower interval, as well as by the seller.

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File URL: http://economics.sas.upenn.edu/system/files/working-papers/10-001.pdf
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Bibliographic Info

Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 10-001.

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Length: 23 pages
Date of creation: 22 Apr 2009
Date of revision: 03 Jan 2010
Handle: RePEc:pen:papers:10-001

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Keywords: first-price auction; second-price auction; risk aversion; reserve price;

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Cited by:
  1. Bettina Klose & Paul Schweinzer, 2012. "Auctioning risk: The all-pay auction under mean-variance preferences," ECON - Working Papers 097, Department of Economics - University of Zurich, revised Jun 2014.
  2. Loertscher, Simon & Niedermayer, Andras, 2014. "Fee-Setting Mechanisms: On Optimal Pricing by Intermediaries and Indirect Taxation," Working Papers 14-03, University of Mannheim, Department of Economics.
  3. Bettina Klose & Paul Schweinzer, 2012. "Auctioning risk: The all-pay auction under mean-variance preferences," Discussion Papers 12/32, Department of Economics, University of York.
  4. Hu, Audrey, 2011. "How bidder's number affects optimal reserve price in first-price auctions under risk aversion," Economics Letters, Elsevier, vol. 113(1), pages 29-31, October.
  5. Hu, Audrey & Offerman, Theo & Zou, Liang, 2011. "Premium auctions and risk preferences," Journal of Economic Theory, Elsevier, vol. 146(6), pages 2420-2439.

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