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Effects of risk aversion in auctions without and with default

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  • Meng Zhang
  • Shulin Liu

Abstract

We study the second‐price auctions without and with default, where bidders are assumed to be risk averse and have uncertain valuations. We show that without default both the equilibrium bid and the seller's expected revenue decrease with risk aversion, and with default the equilibrium bid still decreases but the seller's expected revenue may decrease or increase as risk aversion increases. These results imply that without default the seller prefers risk‐neutral bidders to risk‐averse bidders, but with default the seller's preference is ambiguous, which contrast with the well‐known results obtained in auctions with certain valuations.

Suggested Citation

  • Meng Zhang & Shulin Liu, 2022. "Effects of risk aversion in auctions without and with default," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(3), pages 731-737, April.
    • Handle: RePEc:wly:mgtdec:v:43:y:2022:i:3:p:731-737
    DOI: 10.1002/mde.3414
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    References listed on IDEAS

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