Precautionary Bidding: First Price Auctions with Stochastic Private Values

Peter Eso () and Lucy White
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Lucy White: Oxford University

No 1116, Econometric Society World Congress 2000 Contributed Papers from Econometric Society

Abstract: We analyse a first-price auction where risk-averse bidders bid for an object whose value is risky. Using a private values setting, we provide the first analysis of the pure comparative statics of risk in auctions. We show that as risk increases, decreasingly risk-averse bidders will reduce their bids by more than the risk premium. Ceteris paribus, bidders will be better off bidding for a more risky object. This effect arises because as risk increases, so does the expected marginal utility of income, so bidders are reluctant to bid so highly. Even in the presence of this effect, the expected revenue of a first price auction remains higher than that of a second price auction. We show how this result extends to common values.

Date: 2000-08-01
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