Auctioning risk: The all-pay auction under mean-variance preferences
AbstractWe analyse the all-pay auction with incomplete information and variance-averse bidders. We characterise the symmetric equilibrium for general distributions of valuations and any number of bidders. Variance aversion is a sufficient assumption to predict that high-valuation bidders increase their bids relative to the risk-neutral case while low types decrease their bid. Considering an asymmetric two-player environment with uniform valuations, we show that a more variance-averse type always bids higher than her less variance-averse counterpart. Utilising our analytical bidding functions we discuss all-pay auctions with variance-averse bidders from a designer's perspective. We extend our basic model to include noisy signals and allow for the possibility of variance-seeking preferences and type-dependent attitudes towards risk.
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Bibliographic InfoPaper provided by Department of Economics - University of Zurich in its series ECON - Working Papers with number 097.
Date of creation: Nov 2012
Date of revision: Jun 2014
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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-12-06 (All new papers)
- NEP-EXP-2012-12-06 (Experimental Economics)
- NEP-GTH-2012-12-06 (Game Theory)
- NEP-UPT-2012-12-06 (Utility Models & Prospect Theory)
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