Heterogeneous risk/loss aversion in complete information all-pay auctions

Chen, Zhuoqiong (Charlie), David Ong () and Ella Segev

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We extend previous theoretical work on n-player complete information all-pay auctions to incorporate heterogeneous risk- and loss-averse utility functions. We provide sufficient and necessary conditions for the existence of equilibria with a given set of active players with any strictly increasing utility functions and characterize the players’ equilibrium mixed strategies. Assuming that players can be ordered by their risk aversion (player a is more risk-averse than player b, if whenever player b prefers a certain payment over a given lottery, so does player a), we find that in equilibrium, the more risk-averse players either bid higher than the less risk-averse players and win with higher ex-ante probability – or they drop out. Furthermore, while each player’s expected bid decreases with the other players’ risk aversion, her expected bid increases with her own risk aversion. Thus, increasing a player’s risk aversion creates two opposing effects on total expected bid. A sufficient condition for the total expected bid to decrease with a player’s risk aversion is that this player is relatively more risk-averse compared to the rest of the players. Our findings have important implications for the literature on gender differences in competitiveness and for gender diversity in firms that use personnel contests for promotions.

Keywords: All-pay auction; Risk aversion; Loss aversion (search for similar items in EconPapers)
JEL-codes: D44 D72 D81 (search for similar items in EconPapers)
Date: 2017-06-01
New Economics Papers: this item is included in nep-des, nep-mic and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Published in European Economic Review, 1, June, 2017, 95, pp. 23-37. ISSN: 0014-2921

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Journal Article: Heterogeneous risk/loss aversion in complete information all-pay auctions (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:70793

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