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Premium auctions and risk preferences


  • Hu, Audrey
  • Offerman, Theo
  • Zou, Liang


In a premium auction, the seller offers some “payback”, called premium, to a set of high bidders at the end of the auction. This paper investigates how the performance of such premium tactics is related to the biddersʼ risk preferences. We analyze a two-stage English premium auction model with symmetric interdependent values, in which the bidders may be risk averse or risk preferring. Upon establishing the existence and uniqueness of a symmetric equilibrium, we show that the premium causes the expected revenue to increase in the biddersʼ risk tolerance. A “net-premium effect” is key to this result.

Suggested Citation

  • Hu, Audrey & Offerman, Theo & Zou, Liang, 2011. "Premium auctions and risk preferences," Journal of Economic Theory, Elsevier, vol. 146(6), pages 2420-2439.
  • Handle: RePEc:eee:jetheo:v:146:y:2011:i:6:p:2420-2439 DOI: 10.1016/j.jet.2011.10.005

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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. 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.
    3. Bernard Lebrun, 2015. "Revenue-superior variants of the second-price auction," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 59(2), pages 245-275, June.
    4. Olga Gorelkina, 2014. "Bidder Collusion and the Auction with Target Bids," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2014_10, Max Planck Institute for Research on Collective Goods.

    More about this item


    Premium auction; English auction; Risk preference; Net-premium effect;

    JEL classification:

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


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