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Identification and Estimation of Risk Aversion in First Price Auctions With Unobserved Auction Heterogeneity

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Abstract

We extent the point-identification result in Guerre, Perrigne, and Vuong (2009) to environments with one-dimensional unobserved auction heterogeneity. In addition, we also show a robustness result for the case where the exclusion restriction used for point identification is violated: We provide conditions to ensure that the primitives recovered under the violated exclusion restriction still bound the true primitives in this case. We propose a new Sieve Maximum Likelihood Estimator, show its consistency and illustrate its finite sample performance in a Monte Carlo experiment. We investigate the bias in risk aversion estimates if unobserved auction heterogeneity is ignored and explain why the sign of the bias depends on the correlation between the number of bidders and the unobserved auction heterogeneity. In an application to USFS timber auctions we find that the bidders are risk neutral, but we would reject risk neutrality without accounting for unobserved auction heterogeneity.

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  • Serafin J. Grundl & Yu Zhu, 2015. "Identification and Estimation of Risk Aversion in First Price Auctions With Unobserved Auction Heterogeneity," Finance and Economics Discussion Series 2015-89, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2015-89
    DOI: 10.17016/FEDS.2015.089
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    Cited by:

    1. Emmanuel Guerre & Yao Luo, 2019. "Nonparametric Identification of First-Price Auction with Unobserved Competition: A Density Discontinuity Framework," Papers 1908.05476, arXiv.org, revised Jan 2022.

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    More about this item

    Keywords

    Estimation; First Price Auction; Identification; Risk Aversion; Unobserved Heterogeneity;
    All these keywords.

    JEL classification:

    • C57 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Econometrics of Games and Auctions
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • L00 - Industrial Organization - - General - - - General

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