Leveling the Playing Field for Risk-Averse Agents in Security-Bid Auctions

Andrés Fioriti () and Allan Hernandez-Chanto ()
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Andrés Fioriti: Universidad Nacional del Sur, INMABB-CONICET, San Andrés 800, Bahía Blanca 8000, Argentina
Allan Hernandez-Chanto: University of Queensland, St. Lucia, Queensland 4072, Australia

Management Science, 2022, vol. 68, issue 7, 5441-5463

Abstract: We introduce risk-averse bidders in a security-bid auction to analyze how the security design affects bidders’ equilibrium behavior and, as a result, the revenue and efficiency of the auction. We show that steeper securities provide more insurance because they allow bidders to smooth payoffs across realizations. Such insurance levels the playing field for more-risk-averse bidders, inducing them to bid more aggressively. As a consequence, the auction’s allocative efficiency weakly increases when the seller switches from a flatter to a steeper security. Furthermore, we prove that when bidders are homogeneously and sufficiently risk averse, the only security that guarantees Pareto efficiency is the steepest, that is, a call option. We also determine the relationship between the security design and the auction format. In particular, we show that for convex and superconvex families of securities, the first-price auction yields higher expected revenues, provided a technical condition, whereas for subconvex families, the second price yields higher expected revenues, provided that bidders are moderately risk averse. Finally, we show that steeper securities also attract higher entry from an ex ante perspective, when entry is costly, and discuss the effects that the presence of risk aversion has on informal auctions.

Keywords: securities; risk aversion; steepness; insurance; allocative efficiency; Pareto efficiency; revenue; endogenous entry (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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