Inference of Bidders’ Risk Attitudes in Ascending Auctions with Endogenous Entry, Second Version
AbstractBidders’ risk attitudes have important implications for sellers seeking to maximize expected revenues. In ascending auctions, auction theory predicts bid distributions in Bayesian Nash equilibrium does not convey any information about bidders' risk preference. We propose a new approach for inference of bidders’ risk attitudes when they make endogenous participation decisions. Our approach is based on the idea that bidders' risk premium - the difference between ex ante expected profits from entry and the certainty equivalent - required for entry into the auction is strictly positive if and only if bidders are risk averse. We show bidders' expected profits from entry into auctions is nonparametrically recoverable, if a researcher observes the distribution of transaction prices, bidders' entry decisions and some noisy measures of entry costs. We propose a nonparametric test which attains the correct level asymptotically under the null of risk-neutrality, and is consistent under fixed alternatives. We provide Monte Carlo evidence of the finite sample performance of the test. We also establish identification of risk attitudes in more general auction models, where in the entry stage bidders receive signals that are correlated with private values to be drawn in the bidding stage.
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Bibliographic InfoPaper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 12-016.
Length: 39 pages
Date of creation: 28 May 2011
Date of revision: 17 Apr 2012
Ascending auctions; Risk attitudes; Endogenous entry; Nonparametric Test; Bootstrap;
Find related papers by JEL classification:
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
- C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
- C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-05-02 (All new papers)
- NEP-CTA-2012-05-02 (Contract Theory & Applications)
- NEP-ECM-2012-05-02 (Econometrics)
- NEP-PPM-2012-05-02 (Project, Program & Portfolio Management)
- NEP-UPT-2012-05-02 (Utility Models & Prospect Theory)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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