Premium auctions and risk preferences: An experimental study

Christoph Brunner, Audrey Hu and Jörg Oechssler

Games and Economic Behavior, 2014, vol. 87, issue C, 467-484

Abstract: In premium auctions, the highest losing bidder receives a reward from the seller. This paper studies the private value English premium auction (EPA) for different risk attitudes of bidders. We explicitly derive the symmetric equilibrium for bidders with CARA utilities and conduct an experimental study to test the theoretical predictions. In our experiment, subjects are sorted into risk-averse and risk-loving groups. We find that revenues in the EPA are significantly higher when bidders are risk loving rather than risk averse. These results are partly consistent with theory and confirm the general view that bidders' risk preferences constitute an important factor that affects bidding behavior and consequently also the seller's expected revenue. However, individual subjects rarely follow the equilibrium strategy and revenue in our experiment is lower than in the symmetric equilibrium.

Keywords: Premium auction; Risk preference; Holt–Laury method; Experimental economics (search for similar items in EconPapers)
JEL-codes: C92 D44 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0899825614001109
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Premium Auctions and Risk Preferences: An Experimental Study (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:87:y:2014:i:c:p:467-484

DOI: 10.1016/j.geb.2014.06.002

Access Statistics for this article

Games and Economic Behavior is currently edited by E. Kalai

More articles in Games and Economic Behavior from Elsevier
Bibliographic data for series maintained by Catherine Liu ().