Precautionary Bidding in Auctions

Lucy White and Esö, Péter
Authors registered in the RePEc Author Service: Peter Eso ()

No 3975, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We analyse bidding behaviour in auctions when risk-averse buyers bid for a good whose value is risky. We show that when risk in the valuations increases, DARA bidders will reduce their bids by more than the appropriate increase in the risk premium. Ceteris paribus, buyers will be better off bidding for a more risky object in first-price, second-price, and English auctions with affiliated common (interdependent) values. This ?precautionary bidding? effect arises because the expected marginal utility of income increases with risk, so buyers are reluctant to bid so highly. We also show that precautionary bidding behaviour can make DARA bidders prefer to bid in a common values setting than a private values one when a risk-neutral or CARA bidder would be indifferent. Thus the potential for a ?winners curse? can be a blessing for rational DARA bidders.

Keywords: Risk; Risk-aversion; Prudence; First-price auctions; Second-price auctions; English auctions; Winner's curse (search for similar items in EconPapers)
JEL-codes: D44 D81 (search for similar items in EconPapers)
Date: 2003-07
New Economics Papers: this item is included in nep-com and nep-mic
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Related works:
Journal Article: Precautionary Bidding in Auctions (2004)
Working Paper: Precautionary Bidding in Auctions (2001)
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