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

Diego Carrasco-Novoa () and Allan Hernández-Chanto ()
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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

No 655, Discussion Papers Series from University of Queensland, School of Economics

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.

Date: 2022-04
New Economics Papers: this item is included in nep-cta, nep-des, nep-gth, nep-ias, nep-mic and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:qld:uq2004:655

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