IDEAS home Printed from https://ideas.repec.org/p/tin/wpaper/20140015.html
   My bibliography  Save this paper

How Risk Sharing may enhance Efficiency in English Auctions

Author

Listed:
  • Audrey Hu

    (University of Amsterdam)

  • Theo Offerman

    (University of Amsterdam)

  • Liang Zou

    (University of Amsterdam)

Abstract

We investigate the possibility of enhancing efficiency by awarding premiums to a set of highest bidders in an English auction— in a setting that extends Maskin and Riley (1984, Econometrica 52: 1473-1518) in three aspects: (i) the seller can be risk averse, (ii) the bidders can have heterogeneous risk preferences, and (iii) the auction can have a binding reserve price. Our analysis reveals that the premium has an intricate joint effect on risk sharing and expected revenue, which in general benefits risk averse bidders. When the seller is more risk averse than the pivotal bidder –a condition often verifiable by deduction prior to the auction –the premium also benefits the seller and therefore leads to a Pareto improvement of the English auction. We discuss how this finding is related to the seller’s degree of risk aversion, the reserve price, the riskiness of the object for sale, the degree of heterogeneity in risk preferences among the bidders, and the number of the potential bidders.

Suggested Citation

  • Audrey Hu & Theo Offerman & Liang Zou, 2014. "How Risk Sharing may enhance Efficiency in English Auctions," Tinbergen Institute Discussion Papers 14-015/I, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20140015
    as

    Download full text from publisher

    File URL: https://papers.tinbergen.nl/14015.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. repec:feb:framed:0074 is not listed on IDEAS
    2. Jeremy Bulow & Paul Klemperer, 2009. "Why Do Sellers (Usually) Prefer Auctions?," American Economic Review, American Economic Association, vol. 99(4), pages 1544-1575, September.
    3. Paul Klemperer, 2002. "What Really Matters in Auction Design," Journal of Economic Perspectives, American Economic Association, vol. 16(1), pages 169-189, Winter.
    4. Audrey Hu & Steven A. Matthews & Liang Zou, 2009. "Risk Aversion and Optimal Reserve Prices in First and Second-Price Auctions, Second Version," PIER Working Paper Archive 10-001, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 03 Jan 2010.
    5. Holmstrom, Bengt & Myerson, Roger B, 1983. "Efficient and Durable Decision Rules with Incomplete Information," Econometrica, Econometric Society, vol. 51(6), pages 1799-1819, November.
    6. Krishna, Vijay, 2009. "Auction Theory," Elsevier Monographs, Elsevier, edition 2, number 9780123745071.
    7. Peter M. DeMarzo & Ilan Kremer & Andrzej Skrzypacz, 2005. "Bidding with Securities: Auctions and Security Design," American Economic Review, American Economic Association, vol. 95(4), pages 936-959, September.
    8. Matthews, Steven, 1987. "Comparing Auctions for Risk Averse Buyers: A Buyer's Point of View," Econometrica, Econometric Society, vol. 55(3), pages 633-646, May.
    9. Glenn W Harrison & John A List & Charles Towe, 2007. "Naturally Occurring Preferences and Exogenous Laboratory Experiments: A Case Study of Risk Aversion," Econometrica, Econometric Society, vol. 75(2), pages 433-458, March.
    10. Robert Wilson, 1998. "Sequential equilibria of asymmetric ascending auctions: The case of log-normal distributions," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 12(2), pages 433-440.
    11. Matthews, Steven A., 1983. "Selling to risk averse buyers with unobservable tastes," Journal of Economic Theory, Elsevier, vol. 30(2), pages 370-400, August.
    12. Ian Jewitt, 1987. "Risk Aversion and the Choice Between Risky Prospects: The Preservation of Comparative Statics Results," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 54(1), pages 73-85.
    13. Glenn W. Harrison & John A. List, 2008. "Naturally Occurring Markets and Exogenous Laboratory Experiments: A Case Study of the Winner's Curse," Economic Journal, Royal Economic Society, vol. 118(528), pages 822-843, April.
    14. Hu, Audrey & Offerman, Theo & Zou, Liang, 2011. "Premium auctions and risk preferences," Journal of Economic Theory, Elsevier, vol. 146(6), pages 2420-2439.
    15. Jeremy Bulow & Paul Klemperer, 2009. "Why Do Sellers (Usually) Prefer Auctions?," American Economic Review, American Economic Association, vol. 99(4), pages 1544-75, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hu, Audrey & Zou, Liang, 2015. "Sequential auctions, price trends, and risk preferences," Journal of Economic Theory, Elsevier, vol. 158(PA), pages 319-335.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hu, Audrey & Offerman, Theo & Zou, Liang, 2011. "Premium auctions and risk preferences," Journal of Economic Theory, Elsevier, vol. 146(6), pages 2420-2439.
    2. Vasserman, Shoshana & Watt, Mitchell, 2021. "Risk aversion and auction design: Theoretical and empirical evidence," International Journal of Industrial Organization, Elsevier, vol. 79(C).
    3. Audrey Hu & Liang Zou, 2014. "Sequential Auctions, Price Trends, and Risk Preferences," Tinbergen Institute Discussion Papers 14-139/I, Tinbergen Institute.
    4. Audrey Hu & Liang Zou, 2008. "Auctions under Payoff Uncertainty: The Case with Heterogeneous Bidder-Aversion to Downside Risk," Tinbergen Institute Discussion Papers 08-044/1, Tinbergen Institute, revised 22 Apr 2008.
    5. Committee, Nobel Prize, 2020. "Improvements to auction theory and inventions of new auction formats," Nobel Prize in Economics documents 2020-2, Nobel Prize Committee.
    6. Hu, Audrey & Matthews, Steven A. & Zou, Liang, 2010. "Risk aversion and optimal reserve prices in first- and second-price auctions," Journal of Economic Theory, Elsevier, vol. 145(3), pages 1188-1202, May.
    7. repec:awi:wpaper:0544 is not listed on IDEAS
    8. Baisa, Brian, 2017. "Auction design without quasilinear preferences," Theoretical Economics, Econometric Society, vol. 12(1), January.
    9. Brunner, Christoph & Hu, Audrey & Oechssler, Jörg, 2014. "Premium auctions and risk preferences: An experimental study," Games and Economic Behavior, Elsevier, vol. 87(C), pages 467-484.
    10. J.M.J. Delnoij & K.J.M. De Jaegher, 2016. "Competing first-price and second-price auctions," Working Papers 16-07, Utrecht School of Economics.
    11. Bettina Klose & Paul Schweinzer, 2022. "Auctioning risk: the all-pay auction under mean-variance preferences," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 73(4), pages 881-916, June.
    12. Yili Hong & Chong (Alex) Wang & Paul A. Pavlou, 2016. "Comparing Open and Sealed Bid Auctions: Evidence from Online Labor Markets," Information Systems Research, INFORMS, vol. 27(1), pages 49-69, March.
    13. Joyce Delnoij & Kris Jaegher, 2020. "Competing first-price and second-price auctions," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 69(1), pages 183-216, February.
    14. Lorentziadis, Panos L., 2016. "Optimal bidding in auctions from a game theory perspective," European Journal of Operational Research, Elsevier, vol. 248(2), pages 347-371.
    15. Scott Duke Kominers & Alexander Teytelboym & Vincent P Crawford, 2017. "An invitation to market design," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 33(4), pages 541-571.
    16. Kotowski, Maciej H., 2018. "On asymmetric reserve prices," Theoretical Economics, Econometric Society, vol. 13(1), January.
    17. Philippe Jehiel & Laurent Lamy, 2020. "On the Benefits of Set-Asides," Journal of the European Economic Association, European Economic Association, vol. 18(4), pages 1655-1696.
    18. Axel Ockenfels & David Reiley & Abdolkarim Sadrieh, 2006. "Online Auctions," NBER Working Papers 12785, National Bureau of Economic Research, Inc.
    19. Yonghong Long, 2009. "Bidders¡¯ Risk Preferences in Discriminative Auctions," Annals of Economics and Finance, Society for AEF, vol. 10(1), pages 215-223, May.
    20. Grundl, Serafin & Zhu, Yu, 2019. "Identification and estimation of risk aversion in first-price auctions with unobserved auction heterogeneity," Journal of Econometrics, Elsevier, vol. 210(2), pages 363-378.
    21. Li, Yanhai, 2020. "Optimal reserve prices in sealed-bid auctions with reference effects," International Journal of Industrial Organization, Elsevier, vol. 71(C).

    More about this item

    Keywords

    Risk sharing; Pareto efficiency; Premium auction; English auction; Reserve price; Ensuing risk; Heterogeneous risk preferences;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tin:wpaper:20140015. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tinbergen Office +31 (0)10-4088900 (email available below). General contact details of provider: https://edirc.repec.org/data/tinbenl.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.