IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/3975.html
   My bibliography  Save this paper

Precautionary Bidding in Auctions

Author

Listed:
  • White, Lucy
  • Esö, Péter

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.

Suggested Citation

  • White, Lucy & Esö, Péter, 2003. "Precautionary Bidding in Auctions," CEPR Discussion Papers 3975, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:3975
    as

    Download full text from publisher

    File URL: https://cepr.org/publications/DP3975
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
    2. Roger B. Myerson, 1978. "Optimal Auction Design," Discussion Papers 362, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    3. Eric Maskin & John Riley, 2000. "Equilibrium in Sealed High Bid Auctions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 67(3), pages 439-454.
    4. Péter Esö & Lucy White, 2004. "Precautionary Bidding in Auctions," Econometrica, Econometric Society, vol. 72(1), pages 77-92, January.
    5. Susan Athey & Jonathan Levin, 2001. "Information and Competition in U.S. Forest Service Timber Auctions," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 375-417, April.
    6. A. Sandmo, 1970. "The Effect of Uncertainty on Saving Decisions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 37(3), pages 353-360.
    7. Riley, John G & Samuelson, William F, 1981. "Optimal Auctions," American Economic Review, American Economic Association, vol. 71(3), pages 381-392, June.
    8. Bajari, Patrick & Hortacsu, Ali, 2003. "The Winner's Curse, Reserve Prices, and Endogenous Entry: Empirical Insights from eBay Auctions," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 329-355, Summer.
    9. Matthews, Steven, 1987. "Comparing Auctions for Risk Averse Buyers: A Buyer's Point of View," Econometrica, Econometric Society, vol. 55(3), pages 633-646, May.
    10. Susan Athey, 2002. "Monotone Comparative Statics under Uncertainty," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(1), pages 187-223.
    11. Pratt, John W & Zeckhauser, Richard J, 1987. "Proper Risk Aversion," Econometrica, Econometric Society, vol. 55(1), pages 143-154, January.
    12. Alvin E. Roth & Axel Ockenfels, 2000. "Last Minute Bidding and the Rules for Ending Second-Price Auctions: Theory and Evidence from a Natural Experiment on the Internet," NBER Working Papers 7729, National Bureau of Economic Research, Inc.
    13. Maskin, Eric S & Riley, John G, 1984. "Optimal Auctions with Risk Averse Buyers," Econometrica, Econometric Society, vol. 52(6), pages 1473-1518, November.
    14. Robert Wilson, 1977. "A Bidding Model of Perfect Competition," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 44(3), pages 511-518.
    15. Eeckhoudt, Louis & Gollier, Christian & Schlesinger, Harris, 1996. "Changes in Background Risk and Risk-Taking Behavior," Econometrica, Econometric Society, vol. 64(3), pages 683-689, May.
    16. Kimball, Miles S, 1993. "Standard Risk Aversion," Econometrica, Econometric Society, vol. 61(3), pages 589-611, May.
    17. Hayne E. Leland, 1968. "Saving and Uncertainty: The Precautionary Demand for Saving," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 82(3), pages 465-473.
    18. Dreze, Jacques H. & Modigliani, Franco, 1972. "Consumption decisions under uncertainty," Journal of Economic Theory, Elsevier, vol. 5(3), pages 308-335, December.
    19. John Asker, 2000. "Bidding up, buying out and cooling-off: an examination of auctions with withdrawal rights," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 16(3), pages 585-611.
    20. Nicola Persico, 2000. "Information Acquisition in Auctions," Econometrica, Econometric Society, vol. 68(1), pages 135-148, January.
    21. Milgrom, Paul R & Weber, Robert J, 1982. "A Theory of Auctions and Competitive Bidding," Econometrica, Econometric Society, vol. 50(5), pages 1089-1122, September.
    22. Froot, Kenneth A. & Stein, Jeremy C., 1998. "Risk management, capital budgeting, and capital structure policy for financial institutions: an integrated approach," Journal of Financial Economics, Elsevier, vol. 47(1), pages 55-82, January.
    23. Ross, Stephen A, 1981. "Some Stronger Measures of Risk Aversion in the Small and the Large with Applications," Econometrica, Econometric Society, vol. 49(3), pages 621-638, May.
    24. Kihlstrom, Richard E & Romer, David & Williams, Steve, 1981. "Risk Aversion with Random Initial Wealth," Econometrica, Econometric Society, vol. 49(4), pages 911-920, June.
    25. Froot, Kenneth A & Scharfstein, David S & Stein, Jeremy C, 1993. "Risk Management: Coordinating Corporate Investment and Financing Policies," Journal of Finance, American Finance Association, vol. 48(5), pages 1629-1658, December.
    26. Levin, Dan & Smith, James L, 1994. "Equilibrium in Auctions with Entry," American Economic Review, American Economic Association, vol. 84(3), pages 585-599, June.
    27. Krishna, Vijay & Morgan, John, 1997. "An Analysis of the War of Attrition and the All-Pay Auction," Journal of Economic Theory, Elsevier, vol. 72(2), pages 343-362, February.
    28. Roger B. Myerson, 1981. "Optimal Auction Design," Mathematics of Operations Research, INFORMS, vol. 6(1), pages 58-73, February.
    29. 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 433-445, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lorentziadis, Panos L., 2016. "Optimal bidding in auctions from a game theory perspective," European Journal of Operational Research, Elsevier, vol. 248(2), pages 347-371.
    2. Hanming Fang & Stephen Morris, 2012. "Multidimensional Private Value Auctions," World Scientific Book Chapters, in: Robust Mechanism Design The Role of Private Information and Higher Order Beliefs, chapter 9, pages 319-356, World Scientific Publishing Co. Pte. Ltd..
    3. Christian Gollier & James Hammitt & Nicolas Treich, 2013. "Risk and choice: A research saga," Journal of Risk and Uncertainty, Springer, vol. 47(2), pages 129-145, October.
    4. Hu, Audrey & Offerman, Theo & Zou, Liang, 2011. "Premium auctions and risk preferences," Journal of Economic Theory, Elsevier, vol. 146(6), pages 2420-2439.
    5. Vasserman, Shoshana & Watt, Mitchell, 2021. "Risk aversion and auction design: Theoretical and empirical evidence," International Journal of Industrial Organization, Elsevier, vol. 79(C).
    6. Committee, Nobel Prize, 2020. "Improvements to auction theory and inventions of new auction formats," Nobel Prize in Economics documents 2020-2, Nobel Prize Committee.
    7. 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.
    8. Moreira, Humberto Ataíde & Araújo, Aloísio Pessoa de & Castro Filho, Luciano I. de, 2004. "Pure strategy equilibria of multidimensional and non-monotonic auctions," FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 571, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).
    9. repec:dau:papers:123456789/698 is not listed on IDEAS
    10. White, Lucy, 2008. "Prudence in bargaining: The effect of uncertainty on bargaining outcomes," Games and Economic Behavior, Elsevier, vol. 62(1), pages 211-231, January.
    11. Kimball, Miles S, 1993. "Standard Risk Aversion," Econometrica, Econometric Society, vol. 61(3), pages 589-611, May.
    12. Matthew J. Clayton & S. Abraham Ravid, 1999. "The Effect of Leverage on Bidding Behavior: Theory and Evidence from the FCC Auctions," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-055, New York University, Leonard N. Stern School of Business-.
    13. Ivanova-Stenzel, Radosveta & Salmon, Timothy C., 2008. "Revenue equivalence revisited," Games and Economic Behavior, Elsevier, vol. 64(1), pages 171-192, September.
    14. Dana, Rose-Anne & Scarsini, Marco, 2007. "Optimal risk sharing with background risk," Journal of Economic Theory, Elsevier, vol. 133(1), pages 152-176, March.
    15. Roberto Burguet, 2000. "Auction theory: a guided tour," Investigaciones Economicas, Fundación SEPI, vol. 24(1), pages 3-50, January.
    16. Elmendorf, Douglas W & Kimball, Miles S, 2000. "Taxation of Labor Income and the Demand for Risky Assets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(3), pages 801-833, August.
    17. Joyce Delnoij & Kris Jaegher, 2020. "Competing first-price and second-price auctions," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 69(1), pages 183-216, February.
    18. Dionne, Georges & Harrington, Scott, 2017. "Insurance and Insurance Markets," Working Papers 17-2, HEC Montreal, Canada Research Chair in Risk Management.
    19. Malueg, David A. & Orzach, Ram, 2009. "Revenue comparison in common-value auctions: Two examples," Economics Letters, Elsevier, vol. 105(2), pages 177-180, November.
    20. Ronald M. Harstad, 2007. "Does a Seller Really Want Another Bidder?," Working Papers 0711, Department of Economics, University of Missouri.
    21. Syngjoo Choi & Lars Nesheim & Imran Rasul, 2016. "Reserve Price Effects In Auctions: Estimates From Multiple Regression-Discontinuity Designs," Economic Inquiry, Western Economic Association International, vol. 54(1), pages 294-314, January.

    More about this item

    Keywords

    Risk; Risk-aversion; Prudence; First-price auctions; Second-price auctions; English auctions; Winner's curse;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:3975. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://www.cepr.org .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.