Auctioning risk: The all-pay auction under mean-variance preferences
We develop the idea of using mean-variance preferences for the analysis of the first-price, all-pay auction. On the bidding side, we characterise the optimal strategy in symmetric allpay auctions under mean-variance preferences for general distributions of valuations and any number of bidders. We find that, in contrast to winner-pay auction formats, only hightype bidders increase their bids relative to the risk-neutral case while low types minimise variance exposure by bidding low. Introducing asymmetric variance aversions across bidders into a Uniform valuations, two-player framework, we show that a more variance-averse type bids always higher than her less variance-averse counterpart. Taking mean-variance bidding behaviour as given, we show that an expected revenue maximising seller may want to optimally limit the number of participants. Although expected revenue for risk-neutral bidders typically dominates revenue under mean-variance bidding, if the seller himself takes account of the variance of revenue, he may find it preferable to attract bidders endowed with mean-variance preferences.
|Date of creation:||Nov 2012|
|Date of revision:|
|Contact details of provider:|| Postal: Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom|
Phone: (0)1904 323776
Fax: (0)1904 323759
Web page: http://www.york.ac.uk/economics/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Audrey Hu & Steven A. Matthews & Liang Zou, 2009.
"Risk Aversion and Optimal Reserve Prices in First and Second-Price Auctions,"
PIER Working Paper Archive
09-016, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
- Hu, Audrey & Matthews, Steven A. & Zou, Liang, 2010. "Risk aversion and optimal reserve prices in first- and second-price auctions," Journal of Economic Theory, Elsevier, vol. 145(3), pages 1188-1202, May.
- Esö, Péter & White, Lucy, 2003.
"Precautionary Bidding in Auctions,"
CEPR Discussion Papers
3975, C.E.P.R. Discussion Papers.
- J. Riley & E. Maskin, 1981.
"Optimal Auctions with Risk Averse Buyers,"
311, Massachusetts Institute of Technology (MIT), Department of Economics.
- Matthews, Steven, 1987.
"Comparing Auctions for Risk Averse Buyers: A Buyer's Point of View,"
Econometric Society, vol. 55(3), pages 633-46, May.
- Steven A. Matthews, 1985. "Comparing Auctions for Risk Averse Buyers: A Buyer's Pointof View," Discussion Papers 664R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Saha, Atanu, 1997. "Risk Preference Estimation in the Nonlinear Mean Standard Deviation Approach," Economic Inquiry, Western Economic Association International, vol. 35(4), pages 770-82, October.
- Subir Bose & Arup Daripa, 2007.
"A Dynamic Mechanism and Surplus Extraction Under Ambiguity,"
Birkbeck Working Papers in Economics and Finance
0716, Birkbeck, Department of Economics, Mathematics & Statistics.
- Bose, Subir & Daripa, Arup, 2009. "A dynamic mechanism and surplus extraction under ambiguity," Journal of Economic Theory, Elsevier, vol. 144(5), pages 2084-2114, September.
- Subir Bose & Arup Daripa, 2008. "A Dynamic Mechanism and Surplus Extraction Under Ambiguity," Discussion Papers in Economics 08/24, Department of Economics, University of Leicester.
- Holt, Charles A, Jr, 1980. "Competitive Bidding for Contracts under Alternative Auction Procedures," Journal of Political Economy, University of Chicago Press, vol. 88(3), pages 433-45, June.
- Audrey Hu & Steven A. Matthews & Liang Zou, 2009. "Risk Aversion and Optimal Reserve Prices in First and Second-Price Auctions, Second Version," PIER Working Paper Archive 10-001, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 03 Jan 2010.
- Smith, James L. & Levin, Dan, 1996. "Ranking Auctions with Risk Averse Bidders," Journal of Economic Theory, Elsevier, vol. 68(2), pages 549-561, February.
- Bodoh-Creed, Aaron L., 2012. "Ambiguous beliefs and mechanism design," Games and Economic Behavior, Elsevier, vol. 75(2), pages 518-537.
- Fibich, Gadi & Gavious, Arieh & Sela, Aner, 2004. "Revenue equivalence in asymmetric auctions," Journal of Economic Theory, Elsevier, vol. 115(2), pages 309-321, April.
- René Kirkegaard, 2012. "A Mechanism Design Approach to Ranking Asymmetric Auctions," Econometrica, Econometric Society, vol. 80(5), pages 2349-2364, 09.
- Eso, Peter & Futo, Gabor, 1999. "Auction design with a risk averse seller," Economics Letters, Elsevier, vol. 65(1), pages 71-74, October.
- Alex Robson, 2012. "Contests between players with mean-variance preferences," Discussion Papers in Economics economics:201207, Griffith University, Department of Accounting, Finance and Economics.
- Todd Kaplan & Shmuel Zamir, 2012. "Asymmetric first-price auctions with uniform distributions: analytic solutions to the general case," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 50(2), pages 269-302, June.
When requesting a correction, please mention this item's handle: RePEc:yor:yorken:12/32. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Paul Hodgson)
If references are entirely missing, you can add them using this form.