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Competing Sellers in Security-Bid Auctions under Risk-Averse Bidders

Author

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  • Diego Carrasco-Novoa

    (School of Economics, University of Queensland, Brisbane, Australia)

  • Allan Hernández-Chanto

    (School of Economics, University of Queensland, Brisbane, Australia)

Abstract

We analyze security-bid auctions in which two risk-neutral sellers compete for riskaverse bidders. Sellers face a tradeoff in steepness because steeper securities extract more surplus but feature lower participation ex-ante. Nonetheless, steeper securities also provide higher insurance, making bidders more aggressive. We show that when bidders are homogeneously risk-averse, all equilibria are symmetric. Meanwhile, when they are heterogeneously risk-averse, there is always an equilibrium in which one seller chooses a steeper family to serve the more-risk-averse bidders, while the other chooses a flatter family to serve the less-risk-averse bidders. This result resembles a “Hotelling location” model in the steepness spectrum.

Suggested Citation

  • Diego Carrasco-Novoa & Allan Hernández-Chanto, 2022. "Competing Sellers in Security-Bid Auctions under Risk-Averse Bidders," Discussion Papers Series 655, School of Economics, University of Queensland, Australia.
    • Handle: RePEc:qld:uq2004:655
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    File URL: https://economics.uq.edu.au/files/39806/655.pdf
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    References listed on IDEAS

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