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The role of varying risk attitudes in an auction with a buyout option

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  • Timothy Mathews
  • Brett Katzman

Abstract

An auction with a buyout option is modelled. Such an option allows a bidder to purchase the item being auctioned at a pre-specified buyout price, instead of attempting to obtain the item through the traditional auction procedure. This analysis is motivated by internet auctions where such options are present. If all auction participants are risk neutral, the seller will choose a buyout price high enough so that the option is never exercised. However, a risk averse seller facing risk neutral bidders will choose a price low enough so that the option is exercised with positive probability. Further, if bidders are risk neutral and the seller is risk averse, this option may result in a Pareto improvement compared to a sealed bid second price auction. Copyright Springer-Verlag Berlin/Heidelberg 2006

Suggested Citation

  • Timothy Mathews & Brett Katzman, 2006. "The role of varying risk attitudes in an auction with a buyout option," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 27(3), pages 597-613, April.
    • Handle: RePEc:spr:joecth:v:27:y:2006:i:3:p:597-613
    DOI: 10.1007/s00199-004-0571-8
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