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A pure variation of risk in first-price auctions

  • Oliver Kirchkamp

    ()

    (University of Jena, School of Economics)

  • J. Philipp Reiß

    ()

    (Maastricht University, Economics Department)

  • Abdolkarim Sadrieh

    ()

    (University of Magdeburg, Faculty of Economics and Management)

We introduce a new method of varying the risk that bidders face in first-price private value auctions. We find that decreasing bidders' risk significantly reduces the degree of overbidding relative to the risk-neutral Bayesian-Nash equilibrium prediction. This implies that risk a?ects bidding behavior as generally expected in auction theory. While resolving a long-standing debate on the e?ect of risk on auction behavior, our results give rise to a new puzzle. As risk is diminished and overbidding decreases for most of the value range, a significant degree of underbidding sets in for very low values.

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Paper provided by Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics in its series Jena Economic Research Papers with number 2008-024.

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Date of creation: 19 Mar 2008
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Handle: RePEc:jrp:jrpwrp:2008-024
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  1. Cox, James C & Smith, Vernon L & Walker, James M, 1985. "Experimental Development of Sealed-Bid Auction Theory: Calibrating Controls for Risk Aversion," American Economic Review, American Economic Association, vol. 75(2), pages 160-65, May.
  2. Kirchkamp, Oliver & Reiß, J. Philipp, 2004. "The overbidding-myth and the underbidding-bias in first-price auctions," Sonderforschungsbereich 504 Publications 04-32, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
  3. Brosig, Jeannette & Rei[ss], J. Philipp, 2007. "Entry decisions and bidding behavior in sequential first-price procurement auctions: An experimental study," Games and Economic Behavior, Elsevier, vol. 58(1), pages 50-74, January.
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