An Experimental Test of Precautionary Bidding

Martin Kocher, Julius Pahlke and Stefan Trautmann

Discussion Papers in Economics from University of Munich, Department of Economics

Abstract: Auctions often involve goods exhibiting a common knowledge ex-post risk that is independent of buyers’ private values or their signals regarding common value components. Esö and White (2004) showed theoretically that ex-post risk leads to precautionary bidding for DARA bidders: Agents reduce their bids by more than their appropriate risk premium. Testing precautionary bidding with data from the field seems almost impossible. We conduct experimental first-price auctions that allow us to directly identify the precautionary premium and find clear evidence for precautionary bidding. Bidders are significantly better off when a risky object rather than an equally valued sure object is auctioned. Our results are robust if we control for potentially confounding decision biases.

Keywords: precautionary bidding; prudence; auction; experiment (search for similar items in EconPapers)
JEL-codes: C91 D44 D81 (search for similar items in EconPapers)
Date: 2010-08
New Economics Papers: this item is included in nep-exp, nep-gth and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:lmu:muenec:11743

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