Auctioning risk: The all-pay auction under mean-variance preferences
AbstractWe develop the idea of using mean-variance preferences for the analysis of the first-price, all-pay auction. On the bidding side, we characterise the optimal strategy in symmetric allpay auctions under mean-variance preferences for general distributions of valuations and any number of bidders. We find that, in contrast to winner-pay auction formats, only hightype bidders increase their bids relative to the risk-neutral case while low types minimise variance exposure by bidding low. Introducing asymmetric variance aversions across bidders into a Uniform valuations, two-player framework, we show that a more variance-averse type bids always higher than her less variance-averse counterpart. Taking mean-variance bidding behaviour as given, we show that an expected revenue maximising seller may want to optimally limit the number of participants. Although expected revenue for risk-neutral bidders typically dominates revenue under mean-variance bidding, if the seller himself takes account of the variance of revenue, he may find it preferable to attract bidders endowed with mean-variance preferences.
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Bibliographic InfoPaper provided by Department of Economics, University of York in its series Discussion Papers with number 12/32.
Date of creation: Nov 2012
Date of revision:
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Auctions; Contests; Mean-Variance preferences;
Find related papers by JEL classification:
- C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
- D7 - Microeconomics - - Analysis of Collective Decision-Making
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
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