An experimental study of precautionary bidding

Martin Kocher, Julius Pahlke and Stefan Trautmann

European Economic Review, 2015, vol. 78, issue C, 27-38

Abstract: Auctions often involve goods exhibiting a common-knowledge ex-post risk. In such auctions, precautionary bidding predicts that under expected utility, DARA bidders reduce their bids by more than the appropriate risk premium. Because the degree of riskiness of an auctioned good and bidders׳ levels of risk aversion are difficult to observe in field settings, we conduct experimental auctions that allow us to identify the precautionary premium directly. We find strong evidence for precautionary bidding. The effect is robust to changes in experimental design features. Our experiment provides the first empirical demonstration of precautionary motives in a strategic setting.

Keywords: Precautionary bidding; Prudence; Auction; Experiment (search for similar items in EconPapers)
JEL-codes: C91 D44 D81 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:78:y:2015:i:c:p:27-38

DOI: 10.1016/j.euroecorev.2015.04.009

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