Inference of Bidders’ Risk Attitudes in Ascending Auctions with Endogenous Entry
AbstractBidders’ risk attitudes have key implications for choices of revenue-maximizing auction formats. In ascending auctions, bid distributions do not provide information about risk preference. We infer risk attitudes using distributions of transaction prices and participation decisions in ascending auctions with entry costs. Nonparametric tests are proposed for two distinct scenarios: first, the expected entry cost can be consistently estimated from data; second, the data does not report entry costs but contains exogenous variations of potential competition and auction characteristics. In the first scenario, we exploit the fact that the risk premium required for entry - the difference between ex ante expected profits from entry and the certainty equivalent .is strictly positive if and only if bidders are risk averse. Our test is based on identification of bidders’ ex ante profits. In the second scenario, our test builds on the fact that risk attitudes affect how equilibrium entry probabilities vary with observed auction characteristics and potential competition. We also show identification of risk attitudes in a more general model of ascending auctions with selective entry, where bidders receive entry-stage signals that are correlated with private values.
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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 13-056.
Length: 57 pages
Date of creation: 09 Sep 2013
Date of revision:
Ascending auctions; Risk attitudes; Endogenous entry; Tests;
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-2013-10-25 (All new papers)
- NEP-COM-2013-10-25 (Industrial Competition)
- NEP-UPT-2013-10-25 (Utility Models & Prospect Theory)
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