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Optimal Auctions: Non-expected Utility and Constant Risk Aversion
[A Nonconvex Variational Problem with Constraints]

Author

Listed:
  • Alex Gershkov
  • Benny Moldovanu
  • Philipp Strack
  • Mengxi Zhang

Abstract

We study auction design for bidders equipped with non-expected utility preferences that exhibit constant risk aversion (CRA). The CRA class is large and includes loss-averse, disappointment-averse, mean-dispersion, and Yaari’s dual preferences as well as coherent and convex risk measures. Any preference in this class displays first-order risk aversion, contrasting the standard expected utility case which displays second-order risk aversion. The optimal mechanism offers “ full-insurance” in the sense that each agent’s utility is independent of other agents’ reports. The seller excludes less types than under risk neutrality and awards the object randomly to intermediate types. Subjecting intermediate types to a risky allocation while compensating them when losing allows the seller to collect larger payments from higher types. Relatively high types are willing to pay more, and their allocation is efficient.

Suggested Citation

  • Alex Gershkov & Benny Moldovanu & Philipp Strack & Mengxi Zhang, 2022. "Optimal Auctions: Non-expected Utility and Constant Risk Aversion [A Nonconvex Variational Problem with Constraints]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(5), pages 2630-2662.
    • Handle: RePEc:oup:restud:v:89:y:2022:i:5:p:2630-2662.
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    File URL: http://hdl.handle.net/10.1093/restud/rdab096
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    Cited by:

    1. Alex Gershkov & Benny Moldovanu & Philipp Strack & Mengxi Zhang, 2023. "Optimal Insurance: Dual Utility, Random Losses and Adverse Selection," ECONtribute Discussion Papers Series 242, University of Bonn and University of Cologne, Germany.

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